Standing Committee B

[Sir Nicholas Winterton in the Chair]

Finance Bill

(Except clauses 1, 4, 5, 9, 14, 22, 42, 56, 57, 124, 130 to 135, 138, 139, 148 and 184 and schedules 5, 6, 19 and 25, and any new clauses and schedules tabled by Friday 9th May 2003 relating to excise duty on spirits or R&D tax credits for oil exploration.) - Clause 162 - Transfers of value: attribution of gains to beneficiaries

Amendment proposed [this day]: No. 208, in 
clause 162, page 105, leave out lines 21 to 39.—[Mr. Stephen O'Brien]
 Question again proposed, That the amendment be made.

Nicholas Winterton: I remind the Committee that with this we are discussing the following:
 Amendment No. 209, in 
clause 162, page 105, line 28, leave out 'that date' and insert '9th April 2003'.
 Government amendment No. 297. 
 I sense an air of excitement. We have rounded Tattenham corner and are on the long straight. I am sure that we shall complete the race.

Dawn Primarolo: When we adjourned this morning, we were discussing amendments relating to flip-flops. The Finance Act 1981 introduced a beneficiary charge and the Finance Act 2000 introduced the first anti-avoidance measures. I was explaining to the Committee why I cannot accept the amendment tabled by the hon. Member for Eddisbury (Mr. O'Brien).
 The new provisions catch cases in which some but not all of the steps necessary for the avoidance to work have been carried out before Budget day, but that does not make the legislation retrospective; we had a wide discussion about that. We designed the provision to catch those cases. Those who started to set up structures to avoid a tax charge that has been in place since 1981 should not be surprised when the Government take action to prevent them from achieving that end. 
 The amendment is defective and would not achieve its apparent aim of eliminating retrospection. It would have the opposite effect of making the legislation unacceptably retrospective. It would leave in place the commencement provisions applying the new legislation to transfers of value made on or after 21 March 2000, but delete the further commencement provision that ensures that the new legislation applies only to payments made to beneficiaries on or after Budget day. The suggested deletion would make it possible to apply the new legislation to payments made 
 to beneficiaries before Budget day. That would be unacceptably retrospective. 
 The aim of amendment No. 209 appears to be to clarify one of the commencement provisions. The amendment assumes that the words ''that date'' are unclear and would amend them to ''9th April 2003''. I have two points to make. First, the date to which ''that date'' refers is perfectly clear. It refers back to the date in line 25, so no amendment is necessary. Secondly, the correct date is not 9 April 2003 but 8 April 2003. That is because Budget day must be treated as the start of the new year of assessment and it follows that the previous date to which the amendment refers must be treated as the end of a year of assessment. The amendment is not only unnecessary, but defective. I conclude that amendments Nos. 208 and 209 are wrong in principle, could have a significant avoidance cost and are defective. I have no hesitation in asking the Committee to reject them if they are pressed to a vote. 
 Government amendment No. 297 is included in this group of amendments and I shall speak to it now and move it formally at the appropriate point. Clause 162 and schedule 29 introduce a new rule requiring payments to beneficiaries who are not domiciled and resident in the United Kingdom to be ignored when computing the amounts that may be charged on other beneficiaries under the new provisions. Beneficiaries who are not domiciled and resident in the UK are not charged on capital payments from offshore trustees. The rule prevents tax from being avoided on later payments made to chargeable UK beneficiaries. Amendment No. 297 clarifies the commencement provision for that rule. Our intention is for the new rule to come into effect in respect of payments to non-chargeable beneficiaries made on or after Budget day. The amendment puts that operative date beyond doubt and ensures that it is consistent with the main commencement provisions of clause 162 and schedule 29. At the appropriate time, I shall ask the Committee to support the amendment. 
 New clause 4, as the hon. Member for Eddisbury said in his opening comments on this group of amendments, attempts to tackle the new flip-flops in a different and apparently simpler way. We considered countering schemes in the way suggested in the new clause, but we came to the view that that would not be an effective way of preventing the avoidance and ensuring that payments to UK beneficiaries from offshore trustees are properly taxed. The new clause might work in simpler cases, but it would have the effect of leaving gains attached to a single settlement, so the risk of gains being stranded would remain. A range of avoidance opportunities would remain available for those who are determined to avoid the beneficiary charge. Furthermore, the change that the new clause would make would mean that cases would not be caught when some of the steps required to achieve the tax avoidance had been taken before Budget day and other steps remained to be undertaken. I have already explained at length why we chose our formula. There is evidence that substantial avoidance and significant amounts are 
 involved in such cases. I am satisfied that they should come within the new provisions. 
 In conclusion, although the new clause has simplicity to commend it, it is not a satisfactory way of clamping down on artificially contrived avoidance devices. I ask the Committee to oppose not only amendments Nos. 208 and 209, but new clause 4.

Stephen O'Brien: I am grateful to the Paymaster General for going through the amendments in detail and treating seriously the issues raised. I hope that the Committee agrees that our debate has been important and useful. We are dealing with an exceptionally complex and tricky area, one that from the point of view of the Inland Revenue and the Treasury inevitably creates a contest with some exceptionally knowledgeable and expert professionals. It is inevitable that those of us who seek to scrutinise the matter carefully must go into quite a lot of detail.
 I am satisfied with the Paymaster General's very clear response, particularly on the issues raised in amendment No. 209 and Government amendment No. 297. Those who read our proceedings for further clarity will also appreciate her statements. We had an extraordinarily useful exchange on amendment No. 208. On new clause 4, I acknowledge with gratitude that the Paymaster General notes that it was a genuine attempt to introduce a measure that had the benefit of simplicity and clarity and had logic attached to it, in so far as it removed what had given rise to the initial problem. 
 I do not for one second wish to leave any impression that my colleagues in the official Opposition or I are at all focused on seeking to perpetuate a series of schemes that have operated over a protracted period of years from an original difficulty arising in 1981. It can be recognised that many of those involved, both individual taxpayers and the professionals who advise them—there is quite an industry—came into the situation post-1981 and thought that those schemes were a series of opportunities that one might describe as already cast in some form of precedent that was capable of being relied on. The key point that the Paymaster General made, which has genuinely influenced my thinking, is the interaction between that potential mindset on the part of those involved in the schemes that the Government are seeking to put right, and what was in the Finance Act 2000. She made the fair point that that part of the industry and those individuals—who might not have been familiar with the 1981 genesis of the schemes—have, in a sense, been put on notice. 
 It is accepted that the provisions in the 2000 Act did not get the arrangements right first time. This clause is an attempt to get them right now. We hope that the consultations that the Revenue and Treasury are no doubt having with professional bodies can be concluded very quickly, with a view to ensuring that the measure is well understood, clear and right. On the basis that this has been a genuinely important debate, I am happy not to press new clause 4, which we are conveniently considering with the rest of the group. I 
 beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

Nicholas Winterton: I should not be prepared to accept, even if the hon. Gentleman wanted it, a Division on new clause 4, as it is a straight alternative to clause 162.
 Amendment made: No. 297, in 
clause 162, page 105, line 32, leave out paragraph (d) and insert— 
 '(d) so much of Schedule 4C as amended as provides— 
 (i) that gains treated as accruing to beneficiaries who are not chargeable to tax are treated as outstanding section 87/89 gains, or 
 (ii) that gains in a settlement's Schedule 4C pool are not to be treated as accruing to such beneficiaries, 
 applies only in relation to capital payments made on or after 9th April 2003;'.—[Dawn Primarolo.]
 Clause 162, as amended, ordered to stand part of the Bill.

Schedule 29 - Transfers of value:

Stephen O'Brien: I beg to move amendment No. 210, in
schedule 29, page 354, line 16, at end insert— 
 '(3A) Where any outstanding section 87/89 gains of a settlement are brought into the settlement's Schedule 4C pool by virtue of any provision of this Schedule, they shall thereafter no longer be available for attribution to beneficiaries of that settlement under sections 87(4) or 89(2), nor shall they thereafter be outstanding trust gains of that settlement within the meaning of section 90(2) or (3) on any subsequent occasion to which section 90 might otherwise apply.'.

Nicholas Winterton: With this it will be convenient to discuss the following:
 Amendment No. 212, in 
schedule 29, page 355, line 12, after 'the', insert 'available'.
 Amendment No. 211, in 
schedule 29, page 356, line 34, at end insert— 
 '(4) Where in any year gains are attributed under section 87(4) or section 89(2) to beneficiaries who are chargeable to tax within the meaning of paragraph 8(4), the amount so attributed shall in future years thereafter no longer form part of the Schedule 4C pool of any settlement which is a relevant settlement in relation to that pool.'.

Stephen O'Brien: At the outset, it may assist the Committee to know that amendments Nos. 210 and 211 are alternatives and that No. 212 is a tidying-up amendment. Amendments Nos. 210 or 211 would prevent double counting of a beneficiary's gains that have been or might become chargeable to tax under existing provisions. Although various provisions in the schedule are designed to prevent double taxation by reference to the same gains or the same capital payments, there seems to be nothing to prevent a liability arising under schedule 4C to the Taxation of Chargeable Gains Act 1992 as amended by reference to the same gains that have already triggered the liability under one of the existing provisions. At the very least, an express provision should be included to remove them from the schedule 4C pool if they are taxed under sections 87 or 89.
 I shall just give a brief example for the Committee's benefit. In 2003–04, trust A has a section 87 pool of £2 million, which is also a schedule 4C pool; and trust B is a relevant settlement in relation to the schedule 4C pool, which has no section 87 or section 89 pool of its own. I assume for simplicity that both trusts have substantial funds that remain in cash form and give rise to no further capital gains. Moving to 2005–06, beneficiary C receives a capital payment of £800,000 from trust A. Chargeable gains for that amount are attributed to him by section 87(4) and the section 87 pool is reduced to £1.2 million. Beneficiary C, although domiciled in the UK, is at that time not a UK resident and is therefore not charged to UK tax. For that reason the schedule 4C pool remains at £2 million. In 2007–08 beneficiary C returns to the UK and, because he was not away for five years, is taxed that year under section 10A on the £800,000 capital payment he received in 2005–06. Nothing in the legislation removes that £800,000 from the schedule 4C pool, which remains at £2 million. In 2008–09, beneficiary D, who is UK resident and domiciled, receives a capital payment of £2 million from trust B. That is matched against the £2 million gains in the schedule 4C pool, and beneficiary D is taxed accordingly on £2 million. The schedule 4C pool is extinguished accordingly. 
 Tax has thus been paid by reference to gains of £2.8 million when only £2 million of gains have been realised between the two trusts. Moreover, trust A still has a section 87 pool of £1.2 million, which could generate further liabilities and the making of further capital payments up to that amount to UK beneficiaries. At the end of the day, tax would have been payable on double the amount of the capital gains actually realised. 
 I do not believe that that is what the Treasury and the Revenue intend. I believe that our amendments address that, depending on the way in which the Paymaster General wishes to consider the matter. I hope that that has been as clear an explanation as I can give, albeit brief, of what is quite a complex area.

Rob Marris: The hon. Gentleman has helpfully read out from the parliamentary brief from the Law Society of England and Wales. I am not sure if he attributed that example to the society. Does the hon. Gentleman actually understand it?

Stephen O'Brien: The hon. Gentleman is right. I am grateful to Richard Williams, the chairman of the capital taxes sub-committee of the Law Society. He will be aware that I thought that the summary was particularly helpful. It is important to recognise that my experience in such matters would be much enhanced if I were a beneficiary of anything, let alone one of those trusts. I am not an expert, I have no prospects of being so, and I have had to try to understand the matter in theory. I believe that the example makes sense. I hope that the hon. Gentleman thinks that it makes sense. I thought that the numbers made a useful example. It is relevant to the schedule because it considers the transfers across tax years and the opportunities that that gives, which are by nature
 of the flip-flop variety. I found the Law Society briefing helpful. As it happens, I have another six-page note that I wrote out for myself, but after I had put in all the work, I thought that the Law Society's explanation was briefer and better.
 Amendment No. 212 is intended as a tidying-up exercise. It too comes from the Law Society. It would create consistency between new paragraph 8B(6) to schedule 4C to the 1992 Act and the closing words revised paragraph 8(2). Revised paragraph 8(2) introduces new paragraphs 8B and 8C and signposts those provisions. The first half of paragraph 8(2) appears to do no more than duplicate in slightly different language new paragraph 8B(6), which would be confusing enough if the language were consistent. 
 According to the Law Society, it is clear that the paragraph 8B rules are meant to be more detailed. If the first half of paragraph 8(2) is not to be omitted altogether, it should at least be made consistent with the other locations referred to. No doubt the Paymaster General will accept that amendment or give a cogent reason why she believes that the Law Society has not understood. I am sure that that is summary enough for the Paymaster General.

Dawn Primarolo: The aim of amendments Nos. 210 and 211 is to prevent the potential for double charging by preventing gains from entering more than one gains pool. I have no objection to that aim in principle—in fact, I agree with it. Of course, it is undesirable for gains to go into more than one pool. However, the amendments are unnecessary because their intended effect is already achieved in the legislation. Subsection (2) of new section 85A of the Taxation of Chargeable Gains Act 1992, and new paragraph 1(2) of schedule 4C to the Act are the relevant provisions. Amendments Nos. 210 and 211 are correct in principle, but would duplicate what the published provisions already achieve and are therefore unnecessary. I ask the Committee to reject them should they be put to a vote.
 The aim of amendment No. 212, as the hon. Gentleman explained, is to achieve consistency between the two parts of schedule 29 and to ensure that the capital payments can be charged only once. Again, the Bill already prevents that double charge. Paragraph 8(2) of schedule 4C as amended is meant to point the way to and not to duplicate the rule in paragraph 8B(6) of schedule 4C as amended, which ensures that only available capital payments can be used in attributing chargeable amounts to beneficiaries. The same gain cannot be simultaneously in a section 87 and 89 pool and in a schedule 4C pool. Once a gain goes into a schedule 4C pool, it cannot remain in a section 87 and 89 pool. 
 On that basis, I hope that the hon. Gentleman will accept that, although I think his aims are entirely laudable and agree with them in principle, the Bill already produces the desired result. I hope that when the Law Society has had time to study what I have said about cross-referencing, it will agree.

Stephen O'Brien: I am grateful again to the Paymaster General for setting that out. Those who raised the concern will be able to check it through. I hope that they feel equally satisfied. It would be wholly
 inappropriate to push the amendment to a vote, so I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Schedule 29 agreed to.

Clause 174 - Payments to adopters

Question proposed, That the clause stand part of the Bill.

Howard Flight: We welcome the clause ensuring that payments of financial support to adopters are tax-exempt, but the arrangements present certain questions. First, they apply to England and Wales, but what about Scotland? Secondly, we want to know why in clauses 174 and 175 the Government have not included exemption from national insurance contributions. It seems to make sense to have an automatic exemption from class 4 NICs for those previously liable under cases I and II of schedule D, as if self-employed. Foster parents in particular could find themselves liable to penalties. There is a penalty in the order of £100 for failure to register.
 We would have tabled an amendment, but there is a problem in that NICs are not to be dealt with through the Finance Bill procedure but should be part of social security legislation. However, I understand that the Treasury has a power under the Social Security Contributions and Benefits Act 1992 to make regulations for accepting class 2 earnings on such terms as it sees fit. I wonder whether the model for class 2 exemptions for adopters and fosterers might be found in the scheme that is available for volunteer development workers. 
 It would be worth understanding why the national insurance aspect has not been addressed. The solution that I just suggested should have the advantage that adopters and fosterers would have the option to pay class 2 contributions and accumulate benefits if they wished to do so. Crediting them with class 2 contributions would also be a matter for regulation under social security legislation. Generally, however, those credited would have to pay a minimum amount in addition to the amount credited in order to benefit from entitlements. There is a case for addressing that issue for adopters and fosterers, and I look forward to hearing what the Paymaster General has to say.

Dawn Primarolo: The exemption of financial support payments to adopters in England and Wales follows the Adoption and Children Act 2002. Previously, adoption allowances were tax exempt by an Inland Revenue concession. The clause puts the arrangements on a statutory footing and exempts adoption allowances paid under the previous arrangements in England and Wales and the current arrangements in Scotland and Northern Ireland.
 Exempting financial support from tax means that the payments are automatically excluded from national insurance. They are not earnings from employment, so they would never be liable to 
 employer or employee national insurance;, by exempting payments from tax, the legislation ensures that there will be no liability for class 4 national insurance, which is payable on taxable profits. 
 I believe that I have already covered the point about Scotland. The tax legislation will cover the whole of the United Kingdom, whereas new adoption legislation in particular, following the 2002 Act, now covers England and Wales. That is the purpose of the clause. I hope that the hon. Gentleman is satisfied that we did not forget about national insurance—it has been considered.

Howard Flight: I am delighted that the Minister has put the Government's position on the record. She will be aware that several bodies have asked about national insurance, and it is satisfying to find that the position is as we would wish it without the clauses actually saying it.
 Question put and agreed to. 
 Clause 174 ordered to stand part of the Bill.

Clause 175 - Foster carers

Howard Flight: I beg to move amendment No. 290, in
clause 175, page 111, line 18, at end insert— 
 '(1A) The provisions of Schedule 36 have effect in relation to adult placement carers with the modifications specified in subsections (1B) to (1G) below. 
 (1B) References to the ''provision of foster care'' are to the provision of services under a placement agreement as an adult placement carer. 
 (1C) The expressions ''placement agreement'' and ''adult placement carer'' have the meanings given to them by subsection (1H) and (1J) below, and paragraph 4 does not apply. 
 (1D) References to a ''foster care arrangement'' are to arrangements by which an individual provides services under a placement agreement as an adult placement carer otherwise than as part of a trade, profession or vocation carried on by that individual. 
 (1E) References to ''foster care receipts'' and ''total foster care receipts'' are to receipts in respect of the provision of services under a placement agreement as an adult placement carer. 
 (1F) References to a child are to a service user under a placement agreement. 
 (1G) The weekly amount for a service user for the purposes of ascertaining the individual's limit is £270, and paragraph 8(2) does not apply. 
 (1H) A ''placement agreement'' is an agreement between a service user, an adult placement carer and the local authority or other agency that manages an adult placement scheme (see subsection (1K)), which makes provision for the terms under which the service user is to be accommodated, cared for or supported by the adult placement carer under the adult placement scheme. 
 (1J) An ''adult placement carer'' is a person approved by an adult placement scheme (see subsection (1K)) who provides short or long term accommodation, care or support in their home to vulnerable adults placed with them through and supported by the adult placement scheme. 
 (1K) An ''adult placement scheme'' is a scheme managed by a local authority or independent (profit or non-profit making) agency, and working to government guidelines and standards in England and Wales, Scotland and Northern Ireland, which is responsible:— 
 (a) for recruiting, assessing, training and supporting adult placement carers; 
 (b) for taking referrals, matching and placing service users with adult placement carers; and 
 (c) for supporting and maintaining the placement.'.
 Clause 175 brings in parallel arrangements to ensure that financial support for foster parents is similarly free of income tax. Our question is why foster parents have not been made totally exempt from tax in this respect, as is the case with adopters. I understand that the arrangements have, to some extent, been requested by local authorities, which are in a rather unclear position at present. It is obviously necessary to tidy up the situation, but we cannot see that there will be any material tax revenue resulting, and there is some danger that the record-keeping burden that the arrangements impose will have a negative motivational effect in terms of stimulating the recruitment and retention of foster carers. 
 Currently, foster parents are regarded as realising a profit only to the extent that the local authorities identify such payments as a reward. It is that inexact arrangement that the clause tides up, but it replaces it with a kind of micro-management of the situation. As I understand it, if foster carers keep detailed records and can prove what they have been paid in excess of £10,000, there will not be any tax liability. The bottom-line question is why have any tax liability at all? People are hardly likely to make fortunes out of fostering children, and there remains a huge need for more foster parents to come forward. 
 The amendment would extend the arrangements for fosterers and adopters to carers for adults who are, essentially, in the same situation as the fosterers of children. There is a clear fairness case here. Quite often, adults who need a carer are individuals with considerable problems and just as much work is involved in caring for them as in fostering children. There are also practical issues. If a person being fostered reaches the age of 18, the foster parents potentially lose out on net income. The amendment is designed to cover Scotland and Northern Ireland as well as England and Wales. 
 We hope that the Government will look kindly on our objectives, even if for technical reasons they do not choose to adopt the amendment.

David Laws: We support the clause, which introduces a sensible new tax relief for foster carers, and the amendment, which the hon. Member for Arundel and South Downs (Mr. Flight) has explained clearly. It would extend the exemption that the Government propose for foster carers to adult placement workers. Covering a group of people who are in a similar position to that of foster carers seems a sensible extension of the Government's intention. As I understand it, the amendment has wide support from not only the Chartered Institute of Taxation but the Low Incomes Tax Reform Group and the National Association of Adult Placement Services. Those groups have asked whether the Government could consider extending the exemption in the clause, in identical terms, to adult placement workers, who fulfil a similar function to foster carers but in relation to disturbed or vulnerable adults.
 The Low Incomes Tax Reform Group has also raised as a concern, if the Government's proposals 
 remain unamended, potential hardship if a foster carer continues to care for someone after his or her 18th birthday, when they presumably lose the favourable tax treatment accorded under the clause to those who care for children, rather than adults.

Meg Munn: I am listening very carefully to the points that the hon. Members for Arundel and South Downs and for Yeovil (Mr. Laws) are making, and I am a little confused at the equating of young people who have been in the care of local authorities and reach the age of 18, and are then entitled like any young person to go their own way in the world, and adults who are in placement schemes, perhaps because they have learning difficulties, mental health problems or physical disabilities, and are being cared for by someone in a home-like environment. It is a false and unhelpful comparison between a child in care, who has been looked after by the local authority and reaches the age of 18, and an adult in a placement scheme.

David Laws: I am grateful to the hon. Lady for her intervention, not least because she points out that the circumstances in which many vulnerable young people and individuals over the age of 18 find themselves are different. She can probably envisage circumstances in which a young person is in the care of a foster carer, whose tax position will be favourably affected by clause 175, but who then finds that after the young person turns 18 the relief for the foster carer is taken away. That concern has been raised by organisations such as the Low Incomes Tax Reform Group.
 I want to raise two other issues with the Paymaster General in respect of amendments Nos. 290 and 175. First, will she state—I suspect that she will in her response to the debate—the cost of amendment No. 290, which would extend the provision to adult placement workers? Secondly—this point has been raised by some of the groups that have commented on clause 175—is it possible to simplify the supporting arrangements? They occupy 10 pages of schedule 36, which we will debate in a moment. 
 Clause 175 seems sensible, but surely the Government can consider not only the position of adult placement workers but whether the tax legislation could be introduced in a simplified form, particularly for people who will not have professionals to help them with their tax returns?

Dawn Primarolo: I accept that the amendment is well intentioned. I am grateful for the opportunity to set on the record what the Government are doing about adult placement carers. I am sure we all greatly respect the tremendous service that those individuals provide and that we want to encourage and support them.
 Individuals who provide accommodation and personal care to adults are in a similar position to foster carers and, like them, ought not to be taxed on any payments received that merely reimburse expenses. We intend to ensure that those individuals are treated fairly. The issue is one of means, not ends. I will share with the Committee how we want to proceed in respect of the problems. 
 The threshold system we have used for foster carers works because there is a reasonable degree of consistency in the type and amount of expenses that foster carers incur. From the evidence that we have seen to date, however, we are not convinced that such a simple arrangement would work for adult carers. There are fewer adult placement carers than foster carers, but their circumstances are much more varied. Where adults have been placed in care, it is because they have special needs. 
 The degree of personal care provided to the service user and the expenses incurred in providing that care range over a wide spectrum. At one end of the spectrum, adult placement carers can provide a limited degree of personal care to the service user. There is a thin dividing line between such schemes and supported lodging schemes, which in turn are similar to ordinary commercial lodging arrangements. The foster care relief would be too generous for such schemes. At the other end of the spectrum are adult placement carers who provide substantial physical or medical care or management of behaviour. For those carers, the foster care relief is unlikely to be generous enough, even at the rate suggested in the amendment. However, there is a further complexity in that the host family may not take on all care duties and day care is often provided separately. 
 The diversity of adult care is reflected in the regulatory framework. In England, individual adult placement carers who provide personal care are effectively regulated as care homes. In Scotland and Wales, the scheme is regulated rather than the carer. Northern Ireland has yet to decide; the legislation would allow either approach. The amendment defines ''adult placement carer'' without referring to the regulatory framework, which is unsatisfactory and would potentially include arrangements that do not merit a special relief. For those reasons, the Government do not believe that a statutory relief for adult carers would be appropriate. 
 Instead, the Inland Revenue is reviewing its treatment of adult carers under existing legislation. It is in discussion with the NAAPS about revised guidelines, which will enable carers to take credit for their full expenses with the minimum of record keeping for 2003–04. Those arrangements will address specific concerns that NAAPS has raised about short-term carers and young adults who cross over from foster care, which is an issue that has been raised in Committee. The Revenue expects to be able to reach an agreement on that shortly. 
 I hope that the Committee now understands that the Government must proceed with great care to ensure that the appropriate support is delivered to adult carers. Not only will an agreement be reached shortly, but I promise that we will keep this matter under review. If further evidence emerges indicating that a statutory approach for adult placement care would be workable, then I shall look at it very carefully and try to bring it forward in a subsequent Finance Bill. 
 I am grateful to the hon. Member for Arundel and South Downs for giving me the opportunity to put on the record my views on a service in our communities that we all value and support and that we all want to develop. I hope that he will accepts that the Government are proceeding in a sensible fashion and that we address the points that he has raised. On that basis, I hope that he will withdraw the amendment. If he does not do so, I would reluctantly have to ask my hon. Friends to vote against the amendment if he were to put it to the vote.

Howard Flight: I thank the Paymaster General for her response, which addresses the underlying issue. All I would add is that, given that clauses 174 and 175 contain several changes, it would be useful if clear and comprehensive guidance were issued to carers associations and local authorities covering the Revenue's solution on adult carers, which would allow everybody to have clear guidance on the arrangements. On that basis, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 175 ordered to stand part of the Bill.

Schedule 36 - Foster carers

Howard Flight: I beg to move amendment No. 203, in
schedule 36, page 408, line 23, at end insert— 
 '(7) The Treasury may by order substitute, for the fixed amount in subparagraph (1), a higher figure in relation to a residence in a high-cost area designated by them for the purposes of this paragraph.'.
 The amendment gives the Treasury the power to increase the fixed amount per resident, which is particularly relevant to high-cost areas. As the Bill stands, there is no specific recognition of the considerably different costs of living, and in particular of housing, in different parts of the country. I understand that the £10,000 figure has been determined at the highest possible level, but I am sure that the Paymaster General will agree that living costs are rising and, with an extra £27 billion of tax to pay, they will rise even faster. If the formula is to be used, it is appropriate to include provision for adjustment. I repeat my earlier point that the amount of tax generated will be tiny, if anything, and a lot of paperwork will produce little in tax revenues. 
 Will foster carers and adult carers be under any obligation to complete some form of return? I presume that it will not be an income tax return, as the money is not treated as income. Are they to report the money on a suitable form, or will they be assumed to come within the £10,000 threshold?

David Laws: Amendment No. 203 is interesting, not least in the light of the Government's policy, as set out in the Budget, of trying to respond more flexibly to regional pressures on prices, including house prices, and wages. Although I do not want to encourage the Paymaster General to go too wide of the amendment, the hon. Member for Arundel and South Downs was
 helping to flush out whether the Government have any intention of following through on the logic of introducing greater flexibility to regional pay and house prices into the tax system. As long as I do not cause the Paymaster General to stray, will she say whether she has sympathy not only with the amendment, but with the idea of introducing some sensitivity to local pay and conditions into the tax system?

Jonathan Djanogly: I support this important amendment. There is a general lack of carers and foster parents throughout the country, particularly in high-cost areas, and the problem is exacerbated in high-density areas. That makes it a particular problem for councils in the London area, where I have had first-hand experience of the problem. Although the problem is sometimes that there is a lack of willing people, it is more often that there is a lack of suitable housing. Such people generally need a bigger house for their children, but if they are in an inner-city area with high-cost housing, there is a lack of space. The amendment would help to address that problem.

Dawn Primarolo: I accept that the amendment is well intentioned, but it is unnecessary. The fixed amount is intended broadly to represent the additional fixed expenses of providing foster care, including a larger house and car, domestic equipment and so on. Some of those expenses vary in price by area.
 The figure was set at £10,000 per residence on the basis of data for the highest-cost areas. The amendment assumes mistakenly that regional variations have not been considered in fixing the amount, but the Department of Health research, on which the £10,000 limit was based, found that the capital cost of providing foster care in January 2002 was just under £9,000 a year in London. The average was £6,000 elsewhere, so the £10,000 limit is generous for the lower-cost areas. Although that is the case, we believed that it was preferable to have one fixed rate, rather than a multiplicity of rates that would introduce complexity and scope for disagreement about which areas should be designated high-cost areas. Given the valuable work done by foster carers and the difficulties in recruitment that the hon. Gentleman pointed out, we believed that the provision was the simplest and best way forward. Our intention is that any adjustment of the rates will be on the same basis. 
 The hon. Member for Arundel and South Downs asked about completion of tax returns. If foster carers are exempt, they will not have to complete the self-employment pages of a self-assessment tax return, unless they are required to do so for some other purpose. If they are required to fill in a tax return for other purposes, they will have to record in the self-assessment pages the fact that they are exempt. That will be explained in the Inland Revenue guidance and notes issued with the tax returns, which will be made as simple as possible. 
 The Inland Revenue intends to write shortly to carers who already receive returns to establish whether they continue to need to be part of the self-assessment system. On that basis, we have tried to go for reasonable cost. We recognise the pressures, want to remove complexity and hope to address the questions 
 raised by the hon. Member for Arundel and South Downs regarding completion of tax returns by removing them from the system if necessary. Given those observations, I hope that the hon. Gentleman will agree that we have struck the best balance that can be expected and will not press his amendment to the vote. If he does, I shall ask my hon. Friends to oppose it.

Howard Flight: I think that the Paymaster General said that the assessment was carried out for London in 2002, and that it was under £10,000. Since then, people living in London have had large council tax increases.

Dawn Primarolo: I said that it was under £9,000.

Howard Flight: Since that time, if we add up council tax increases, congestion charges and cost of living increases, the Paymaster General might be surprised to find that there has been a big increase in the cost of living in London. The computation, if done today, would be pretty close to £10,000. If the arrangements are going to be on a single figure basis for the most expensive part of the country, what will be the arrangements to adjust that figure over time?
 Even if, to keep things simple, the Government do not want to follow the route of having the power to specify different residents' sums for different areas—I can see the argument for that—the £10,000 limit is already not enough for London from a practical point of view. If it is not enough today, it certainly will not be enough in a year's time. Subject to some understanding as to how the limit will be adjusted to keep it adequate for more expensive areas, I will withdraw the amendment.

Dawn Primarolo: We estimate that in 2003–04, more than 90 per cent. of foster carers will be exempt from income tax on their income for providing care, notwithstanding the hon. Gentleman's points. With regard to his comments on rising costs, I said that we would increase the single amount in line with the highest-cost areas. The annual process of ensuring that the amount keeps pace will be dealt with in the Budget. We hope that, at £10,000, it is set far enough ahead of the cost, as outlined by the Department of Health, to give us considerable room in the year of its introduction.

Howard Flight: I thank the Minister. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Schedule 36 agreed to. 
 Clause 176 ordered to stand part of the Bill.

Clause 177 - Loan relationships: amendments

Question proposed, That the clause stand part of the Bill.

Howard Flight: Clause 177 and schedule 37 are relatively technical and complex provisions that relate to company loan relationships. We understand from the introductory words of schedule 37 that it is designed to correct some technical defects on loan relationships in the Finance Act 1996. That relates also to clause 178, which makes changes to derivative
 contract legislation that are intended to be in line with the changes made in schedule 37 on loan relationships.
 Both procedures have a rule under which transactions between members of the same group are generally tax exempt; the arrangements are supposed to be tax neutral, and the intention is to ensure that the arrangements work and are even handed. I should probably deal with the specific points that I wish to raise once we come to schedule 37, but I have commented on clause 177 because we are concerned that the latter objective that I described is not entirely achieved by schedule 37 arrangements.

David Laws: The Paymaster General will probably be aware that the Law Society and others have criticised clause 177 and its associated schedule. It has been said that the information made available at the time of the Budget was insufficiently precise, particularly given that many individuals would have been immediately affected. The Law Society suggests that when tax changes are effective from Budget day rather than from some future date, the Government should consider immediate publication of the relevant clauses, so that those who are affected by them can manage their tax affairs immediately. Is it in the Government's mind to take that sort of approach in future?

Dawn Primarolo: I shall leave comments on specific points until we reach the schedule. Our purpose is to make a number of corrections to the loan relationship rules in the Finance Act 1996. First, the provisions ensure that profits do not fall out of charge when contracts are transferred into a group. Secondly, they put beyond doubt the current tax treatment of contracts in inter-groups. Thirdly, they ensure that exchange differences are correctly recognised when contracts are transferred into a group. Fourthly, they prevent the loss of tax—perhaps up to £2 billion—on a technical defect in the transitional rules relating to changes that were made in the Finance Act 2002. Lastly, they would stop avoidance involving late paid interest and discounts owed to connected persons and participants, which involves something in the region of £50 million.
 The direct answer to the hon. Member for Yeovil is that publication of the legislation followed normal practice by Governments of all political persuasions when publishing anti-avoidance procedures. We shall be able to discuss how the provisions will work when debating schedule 37. I do not accept that the material published on Budget day contained insufficient information. It simply explained simply what the measure does. There is no evidence to suggest that the information provided was inadequate. Indeed, the Inland Revenue received phone calls on and following Budget day from advisers who recognised that the anti-avoidance measure applied to their clients, and who sought confirmation that the view that they had formed from the Budget material was correct. Some of those comments, with which I shall deal, were from the Law Society, which felt that it had been targeted. That was not the case; it was an anti-avoidance measure. I 
 shall go into a little more detail when we discuss the amendments.

David Laws: Will the Paymaster General give way?

Dawn Primarolo: No.
 Perhaps we can deal with the matter when we get to the amendments. We followed the practice of all Governments in publishing anti-avoidance legislation and ensuring that details are explained. It will be much more helpful if we can pick up the points made by the Law Society in the context provided by the schedule. 
 Question put and agreed to. 
 Clause 177 ordered to stand part of the Bill.

Nicholas Winterton: Before we move on to schedule 37, may I say that we have just under two and a half hours to complete some 47 clauses, schedules and new clauses. I merely draw that to the attention of the Committee.

David Wilshire: On a point of order, Sir Nicholas.

Nicholas Winterton: No. Hold on. I ask the hon. Gentleman to resume his seat. Because it is very hot, it is easy to lull oneself into an inaccurate sense of security about the progress that we are making. I am in the hands of the Committee. I have pointed out a fact. If the hon. Gentleman still wishes to intervene, he may.

David Wilshire: Sir Nicholas, you rightly point out how much there is still to do. That further proves that the artificial deadline is unacceptable and stupid, and should not have been imposed.

Nicholas Winterton: The Committee notes what the hon. Gentleman says. However, we are subject to a decision that has already been made by the House as a whole, and we have to implement what it has decided.Schedule 37 Loan relationships: amendments

Schedule 37 - Loan relationships: amendments

Howard Flight: I beg to move amendment No. 310, in
schedule 37, page 415, leave out lines 1 to 3 and insert— 
 '(4) The amendments made by this paragraph have effect in relation to loan relationships entered into on or after 9th April 2003'.

Nicholas Winterton: With this it will be convenient to discuss the following:
 Amendment No. 311, in 
schedule 37, page 416, leave out lines 43 and 44 and insert— 
 '(4) The amendments made by this paragraph have effect in relation to relevant discounted securities issued on or after 9th April 2003'.
 Amendment No. 322, in 
schedule 37, page 417, leave out lines 28 and 29.

Howard Flight: As the Committee will be aware, amendments Nos. 310 and 311 have, in essence, been proposed by the Law Society. Paragraphs 2 and 5 of the schedule could affect private equity and venture capital transactions entered into on the basis of the law as it is. Such transactions are highly dependent on cash flow forecasts, and changes in paragraphs 2 and 5 could impact on the expected cash flows. The amendments would limit the affect of the new rules
 to loan relationships entered into after 9 April 2003, to avoid the possibility of a retrospective impact. Amendment 322 seeks, as an alternative route, to remove the retrospective aspects of the schedule, backdating tax changes on the grounds of complexity where Government could not have been expected to have got it entirely right in 1996 and 2002. The equivalent change in clause 178, with the same motive and as set out in the explanatory notes, only takes effect from Budget day. Therefore, would it not be reasonable to knock out the retrospective element in the schedule, too, and allow taxpayers to rely on the Finance Act 2002? The amendment would also give the benefit of some group relief for a short period.

Dawn Primarolo: I shall ask the Committee to reject amendments Nos. 310, 311 and 322. Amendments Nos. 310 and 311 would preserve the tax benefit of the loophole in the loan relationship legislation for those companies that entered into arrangements designed to exploit it before the Finance Act measure was announced on 9 April.
 The loophole has been exploited to create an allowable deduction for interest in circumstances in which the legislation was intended to allow a company an interest deduction only when interest was paid or, as regards a discounted security, a deduction for discount when the security was redeemed. The measure has effect only for interest or discount that accrues on or after 9 April, and it is right that this change should apply to arrangements already in existence when announced. If existing arrangements were allowed to escape, the cost to the Exchequer would amount to tens of million of pounds. 
 Amendment No. 322 would prevent a Finance Bill measure originally announced on 30 September 2002 from correcting a defect in the loan relationship transitional rules in the Finance Act 2002. The amendment would cost the Exchequer hundreds of millions of pounds by delaying the start date of the original measure, which is intended to have effect for accounting periods beginning on or after 1 October 2002. The effect of the measure is to ensure that under the loan relationship legislation introduced in the Finance Act 2002 companies can continue to carry forward unutilised non-trade loan relationship deficits and correctly offset them against profits for later accounting periods, exactly as allowed under the old regime. It cannot be proper for some companies to benefit from such a loophole at a cost to the Exchequer and, ultimately, to other taxpayers. 
 As hon. Members know, the Bill has been certified as compatible with the European convention on human rights, so the clause and the schedule comply with human rights requirements. I make no apology for introducing legislation with immediate effect from 9 April 2003, the date on which it was announced. Such action to stop avoidance in its tracks has been standard practice by successive Governments, as I said. For example, provisions with a commencement date of Budget day, 26 November 1996, were ultimately included in the Finance Bill 1997, such as the leasing provision in schedule 12.

David Laws: I do not question the Paymaster General's right to introduce measures immediately
 from Budget day. However, on behalf of the Law Society, which has made representations, I seek clarification as to whether in such cases it would useful, sensible and possible for the Government to release the detail of the clauses on the same day as the Budget, so that there would be greater certainty about the tax situation and people perhaps would not have to telephone the Treasury to establish what the rules are.

Dawn Primarolo: I am in danger of repeating myself. For the third time, because the issue is anti-avoidance, it is the practice of Governments to announce measures on Budget day, and the clauses are provided in the Finance Bill. The matter is quite straightforward: the obligation on the Government is to ensure that their Budget day announcement on what is to be done is clear. That is what is happening in the present case. I understand that some take the view that the relevant provisions were targeted at the venture capital industry, but they were not. There are already discussions—

John Burnett: Will the Paymaster General give way?

Dawn Primarolo: Could I just finish my sentence? That would be very helpful, thank you.
 I have said that there have already been discussions on the Venture Capital Association's views on other aspects of the Bill. However, I can absolutely assure hon. Members that nothing about the measure was not clearly announced in the Budget release. I remain implacably committed to ensuring that anti-avoidance is dealt with swiftly and that the procedures laid down by the Government are followed. The provision in question does that, and I continue to ensure that the Government meet their obligations.

John Burnett: We are dealing with retrospective taxation, because we are talking about existing loan relationships entered into on or before 9 April. Will the Paymaster General tell us whether those existing loan relationships, which will now be caught, will be taxed in the new way—as it were, the exempt ones—from Budget day this year, or will they be taxed from last year?

Dawn Primarolo: We dealt at length with retrospection. I shall not go over that ground again this afternoon. On the Government's behalf, I clearly laid out the difference between retrospection and ensuring that those who seek to use legislation in a way that was not intended cannot do so. I characterised the difference by saying that those who play with fire can expect to get their fingers burnt when the Government act.
 There is no evidence to suggest that the tax break was critical to the pricing arrangements already entered into before 9 April. It is more likely that the party saw it as an extra bonus at the expense of the Treasury, and it would be unfair to allow this unjustified tax advantage to continue for a few at the expense of taxpayers in general. The measure affects only transactions that occur on or after, or amounts accruing in periods following, 9 April 2003—the date of the announcement. I commend the schedule to the Committee and recommend that my hon. Friends oppose the amendment.

Howard Flight: We will not press the matter to a vote. We are short of time, and to do so would be a waste of time. The Government would be wise to listen carefully to the venture capital industry, and I am glad that the Paymaster General acknowledged their concerns. She may find that the Law Society proposals in particular, as represented by amendments Nos. 310 and 311, are a better alternative to the possibility of some venture capital deals failing where the costs are not that great.

Dawn Primarolo: I am sure that the hon. Gentleman will accept that the arrangement gives certainty to the vast majority of venture capital funds that the rule restricting relief for late paid interest does not apply to investments that they make.

Howard Flight: I thank the Paymaster General for putting that statement on the record. It will be appreciated.
 I shall not enter into the retrospection argument, but I am still concerned that the Paymaster General will rightly consider matters from the Government's perspective, but the other perspective, especially of business circumstances, will be different. It will be: ''These are the arrangements. If the Government drafting got it wrong last time, hard luck.'' It is not always correct to use the language that the Paymaster General uses in that context. However, we have made our points. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 323, in
schedule 37, page 417, line 29, at end add— 
 'PART 3 OTHER AMENDMENTS 
 Definition of collective investment scheme 
 (1) The Finance Act 1996 is amended as follows. 
 (2) In section 103, in subsection (1) insert in the appropriate place:
''collective investment scheme'' means any arrangements which amount to a collective investment scheme for the purposes of section 235 Financial Services and Markets Act 2000 or any arrangements which would amount to a collective investment scheme for the purposes of that section but for being arrangements falling within paragraph 21 of the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (SI 2001/1062) as amended.
(3) In each of the following provisions, after the words ''collective investment scheme'', delete the words ''within the meaning of section 235 of the Financial Services and Markets Act 2000''; 
 section 87(5A); 
 section 87A(3); 
 paragraph 2(1B) of Schedule 9; 
 paragraph 18(1)(c) of Schedule 9; 
 paragraph 20(5) of Schedule 9; 
 paragraph 20(6) of Schedule 9'.

Howard Flight: The amendment is designed to put investee companies that are venture capital limited partnerships, which happen to be bodies corporate, in the same position as investee companies that are limited liability partnerships established under English law. Many people viewed the press release announcing schedule 37 as obscure, as my hon. Friend the Member for Huntingdon (Mr. Djanogly) said. There were
 complaints, for better or worse, that it was not clearly understandable, especially in the venture capital industry. Under the Finance Act 2002, venture capital limited partnerships were not covered by the definition of collective investment schemes—for example, if they were established in the United States—and were excluded from the general arrangements. They benefited from the legislation only in obtaining some certainty of tax treatment of loans made to UK investee companies by making loans to a subsidiary of the company in which they held shares. Paragraphs 2 and 5 of schedule 37 close that arrangement. The amendment is therefore aimed at putting investee companies of VC partnerships that happen to be bodies corporate under the Finance Act—as it will be—in the same position as investee companies of limited partnerships established here in the UK. Surely, it cannot be wise to discourage US-based venture capital investment in the UK by putting them into a tax-disadvantaged position. The amendment also contains other measures that seek to address similar discrimination in other parts of the Finance Act 1997.

Dawn Primarolo: I ask the Committee to reject amendment No. 323, which creates, for the purposes of loan relationship legislation, a new and potentially very wide definition of a collective investment scheme. The amendment primarily relates to the loan relationship avoidance measure that has already been discussed in the context of previous amendments. An exception already exists to that avoidance rule for limited partnerships that are also collective investment schemes within the definition of the Financial Services and Markets Act 2000. That exception was agreed with the British Venture Capital Association, in discussion with the Revenue, leading up to the changes to loan relationship rules introduced in the Finance Act 2002.
 The Finance Bill measure has exposed a degree of uncertainty among some venture capital funds. In some cases of foreign limited partnerships, funds are unsure whether the Revenue will apply an overly narrow interpretation of the definition of collective investment schemes. The Revenue is already in discussions with the BVCA, with a view to resolving the problem through revised guidance. 
 More generally, the amendment goes much further than I consider reasonable in moving away from the more targeted Financial Services and Markets Act 2000 definition of a collective investment scheme. It creates a very wide definition, which would have the effect of treating most, if not all foreign limited partnerships as though they were collective investment schemes. It will take some time to consider all the possible implications of such a definition, and the consequent risk to the Exchequer. There is real concern that the amendment could lead to tax leakage. I hope that the hon. Gentleman will withdraw his amendment, but if he wishes to put it to a vote, I will ask my hon. Friends to oppose it, for the reasons that I have expressed.

Howard Flight: I think that I was comfortable with what the Paymaster General said. However, she did not say
 that it is the Government's intention that investee companies that are venture capital limited partners and bodies corporate will be put in the same position under loan relationship tax law as investee companies and limited partnerships established under UK law. That position is unclear. The point at the bottom of the heap is simple. Are they to be treated in the same way under the Government's measures?

Dawn Primarolo: As I explained, we are in discussions with the British Venture Capital Association. I need to see how those discussions go. It would be quite inappropriate for me to give a blanket undertaking of such a wide-ranging commitment. Where the BCVA believes that there is uncertainty, discussions on revised guidance will take place. I think that that is the best way to proceed.

Howard Flight: I accept that that is the best way to proceed. However, there is a very simple point to be made. It is not in the interests of the economy to give tax-privileged positions to domestic limited liability partnerships, at the expense of US ones. If we wish to attract their business, the tax rules should be broadly the same.

Dawn Primarolo: The relief is available for any kind of limited partnership that is a collective investment fund as defined in section 235 of the Financial Services and Markets Act 2000. The use of that definition to determine who qualified for the relief was agreed between the Inland Revenue and the venture capital industry during the consultation process on the reforms introduced in the Finance Act 2002. I cannot see why that does not satisfy the hon. Gentleman.

Howard Flight: Times move on.

Dawn Primarolo: This is only 2003.

Howard Flight: Yes, but times move on. That was agreed because that there was another mechanism, which I described a few minutes ago, involving a subsidiary company, by which foreign corporate limited partnerships achieved parity with UK limited partnerships. Parity worked by a different mechanism. I repeat that there is no commercial logic, or economic self-interest logic, in having foreign bodies that happen to have a slightly different legal structure placed at an advantage in comparison with domestic bodies. The Paymaster General said that discussions are proceeding. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Schedule 37 agreed to. 
 Clause 178 ordered to stand part of the Bill.

Clause 179 - Contributions to urban regeneration companies

Howard Flight: I beg to move amendment No. 315, in
clause 179, page 114, line 12, leave out 
 'any expenditure incurred by him in making' 
 and insert 
 'the amount or value of'.

Nicholas Winterton: With this it will be convenient to discuss the following:
 Amendment No. 305, in 
clause 179, page 114, leave out lines 16 to 18 and insert— 
 '(2) Where any such contribution is made by an investment company, the amount or value of the contribution shall for the purpose of section 75 be treated as an expense of management if it would not otherwise be deductible in computing the company's profits.'.
 Amendment No. 306, in 
clause 179, page 114, line 19, leave out 'Subsection (1) above does' and insert 
 'Subsections (1) and (2) above do'.

Howard Flight: We welcome the status of urban regeneration companies, but we ask that the criteria for qualifying for that status be a little less restrictive than those that have been provided. They will exclude in many cases smaller organisations whose purpose may be to reduce unemployment in an area, generating training and job opportunities. Many smaller organisations are unlikely to meet the requirement in new section 79B(7)(b) of the Taxes Act 1988. For example, a community company that has the objective of training and employing people, sells what it produces and reinvests any profits for further training will be pretty unlikely to qualify. Many such companies exist, which do not qualify for charitable status, are limited by guarantee and are driven by some form of social ethic. Surely to exclude such organisations by focusing solely on the development of an area, rather than contributing to that development, would be to lose a desirable opportunity. We appreciate that safeguards are needed, but the legislation seems unnecessarily restrictive.
 Amendment No. 315 would provide that the tax deduction should equal the amount of the asset. In essence, that is to cover donations in kind. The relevant new section allows a tax deduction for contributions whether they are made in cash or in kind, but the amount of the tax deduction is worded as 
''any expenditure incurred by him in making the contribution''.
 The Paymaster General will be aware that that point has been raised by the Law Society. 
 On amendment No. 306, new section 79B(2) gives a tax deduction to an investment company that makes a contribution in cash or kind to an urban regeneration company. As drafted, that applies to 
''any expenditure allowable as a deduction under subsection (1) above''.
 We question whether that drafting is correct, because subsection (1) gives a deduction only to 
''a person carrying on a trade, profession or vocation''.
 Amendment No. 305 would substitute for new section 79B(2): 
''Where any such contribution is made by an investment company, the amount or value of the contribution shall for the purpose of section 75 be treated as an expense of management if it would not otherwise be deductible in computing the company's profits.''
 The final two amendments are essentially Law Society points, and I trust that the Government have had time to focus on them.

Dawn Primarolo: I understand that the amendments are intended to clarify the amount that qualifies for deduction when a business contributes in kind to an urban regeneration company. It may help if I briefly explain the purpose of the clause and the way in which it interacts with section 74 of the Taxes Act, which contains the general rule on deductions.
 A business can deduct expenditure if it is revenue in nature and incurred wholly and exclusively for business purposes. Expenditure that falls within the general rule may still be excluded from the deduction by specific rules such as those for business entertainment and gifts. Expenditure by a business on a contribution to an urban regeneration company that is wholly or partly motivated by altruistic or public-spirited purposes would usually be excluded from deduction by the general rule, and the purpose of the clause is to ensure that such expenditure is not excluded. A contribution can be in cash or in kind. If it is in kind, the clause will allow the business a deduction on the expenditure incurred on making the contribution. 
 It may be helpful to provide some examples of what that expenditure includes. If the business seconds an employee, its deductible expenses will include the employee's wages. If it provides rent-free accommodation, its deductible expenses will include the rent actually paid, including the heating, lighting and so on, of that property. If the business donates a computer, the normal rules will generally allow a deduction equivalent to the market value at the time of the donation. That will all be made clear in Inland Revenue guidance. 
 Amendment No. 315 would allow a deduction on the amount or value of the contribution rather than on actual expenditure. In some cases, that would allow a deduction greater than would be allowable under the normal rules, which I assume is an unintended effect of the amendment. For example, the notional rental value of accommodation provided rent-free may be greater than the actual costs incurred by the donor. That would be too generous, as I hope that the hon. Gentleman would agree. 
 Amendment No. 305 would apply the same unacceptably generous rule to contributions by investment companies. In fact, the wording appears to go further than that and to allow a deduction in circumstances in which a deduction would have been denied under one of the specific rules. I hope that, considering the examples that I have given and the fact that the conditions will be spelled out in Inland Revenue guidance, the hon. Gentleman will accept that, while they are well intentioned, his amendments go further than intended and are unnecessary.

Howard Flight: It seems to me that the wording of proposed new section 79B(1) is wrong in referring to
''any expenditure incurred . . . in making the contribution''
 rather than its value. If items in kind are contributed, there will not be any value, and only minimal expenditure will be associated with them. I cannot see how the Government square their stated intent to include items in kind with not treating them at a fair market value. 
 This is the Government's initiative; if they want it to work and get the best out of it, I cannot see why they would want to exclude investment companies or limit the parties to 
''a person carrying on a trade, profession or vocation''.
 Presumably, the objective is to achieve success by urban regeneration companies. The danger is that the provision will be used much less than hoped or intended if it includes those complexities and exclusions.

John Burnett: The hon. Gentleman will recall that on previous Finance Bills we discussed the philosophical problem of investment bad, trade good. He may also recall, as I do, the Paymaster General or another Minister saying that the whole tax philosophy is in the course of being changed. Surely, this Finance Bill provides the opportunity to get things right.

Howard Flight: I thank the hon. Gentleman for his comment. I also recollect that that principle was addressed in the review of corporation tax which the Treasury undertook last summer, albeit that some of its other conclusions seem to have gone a little off the rails.
 The measure is not a major one, but I would have thought that it is silly, if the Government want regeneration companies to be successful, for the arrangements not to be straightforward. If people donate money or goods they should receive a fair tax deduction, and it does not matter what sort of business or party they are. However, I shall not press the amendment to a vote. If the Government want to damage their own initiative, that is their business. I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 313, in
clause 179, page 114, line 21, after 'benefit', insert '(other than publicity)'.

Nicholas Winterton: With this it will be convenient to discuss the following:
 Amendment No. 314, in 
clause 179, page 114, line 23, at end insert 
 '; and for the purposes of this subsection a person shall not be regarded as having received, or being entitled to receive, a benefit if it is a benefit provided by an urban regeneration company in the normal course of, or incidental to, discharging the criteria mentioned in subsection (7) below.'.
 Amendment No. 312, in 
clause 179, page 114, line 27, after 'benefit', insert '(other than publicity)'.

Howard Flight: Amendments Nos. 313 and 312 are designed to allow relief when a contribution is made as part of a sponsorship agreement or in return for publicity. The Minister will be aware that the matter was raised by the Law Society. The clause seems to rule out the possibility of a contributor entering into a sponsorship agreement with an urban regeneration company or making a contribution for part of which it receives publicity. What is the logic of that? If that is not the intention, perhaps the Minister could explain the position for the record.
 Amendment No. 314 focuses on similar ground. What happens if the donor is a local business within the urban area that is being regenerated? As we understand it, it would receive tax relief on the donation only if the urban regeneration company was incompetent and provided no benefit to the locality. It would be strange to prevent local shopkeepers, for example, from clubbing together to sort out their neighbourhood.

Dawn Primarolo: My earlier comments on the purpose and operation of the clause apply equally to the amendments. They are intended to ensure that a business will be entitled to a deduction on its expenditure on contributions to an urban regeneration company if the only benefit it receives in return from the company is publicity or the general benefit that it and others would derive from the normal activities of an urban regeneration company. There is no need for any such clarification.
 Clause 179, with section 74 of the Taxes Act 1988, provides a business with a deduction in circumstances described in the amendments The anti-avoidance provision in subsection (3) of the clause prevents a deduction only in circumstances in which there is a clear, tangible, private or other non-business quid pro quo for the provision of the benefit. Inland Revenue guidance will make that clear. The same anti-avoidance rule is contained in sections 79 and 79A of the Taxes Act 1988 for contributions to bodies such as business links and has not caused any difficulties, so I see no reason why it should do so here. I hope, with that clarification, that the hon. Gentleman will agree that the amendment is not necessary and therefore withdraw it. If not, I shall ask my hon. Friends to oppose it.

Howard Flight: I think that what the Paymaster General said means that amendment No. 314 is not necessary. Could she make clear in simple language whether or not sponsorship arrangements with an urban regeneration company will qualify?

Dawn Primarolo: The clause and the new section will provide a business with a deduction in the circumstances described in the amendments.

Howard Flight: I thank the Minister. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 179 ordered to stand part of the Bill. 
 Clause 180 ordered to stand part of the Bill.

Schedule 38 - Sale and repurchase of securities etc

Dawn Primarolo: I beg to move amendment No. 300, in
schedule 38, page 419, line 42, at end insert— 
 9A In section 730A of the Taxes Act 1988 (treatment of price differential on sale and repurchase of securities), after subsection (8) insert— 
 ''(8A) In this section references to the sale price are to be construed— 
 (a) in a case where the securities are bought back by the transferor or a person connected with him in compliance with a requirement imposed in consequence of the exercise of an 
option acquired under the agreement to sell the securities or any related agreement, as references to what would otherwise be the sale price plus the amount of any consideration given for the option, and 
 (b) in a case where the securities are so bought back in the exercise of an option so acquired, as references to what would otherwise be the sale price less the amount of any consideration so given, 
 unless the consideration is brought into account under Schedule 26 to the Finance Act 2002 (derivative contracts).''.'.

Nicholas Winterton: With this it will be convenient to discuss the following:
 Government amendments Nos. 301 and 302. 
 Amendment No. 308, in 
schedule 38, page 422, leave out lines 29 to 39 and insert— 
 '(2A) Where— 
 (a) a company has a relationship to which section 730BB of the Taxes Act 1988 applies (exchange gains and losses on sale and repurchase of securities), and 
 (b) the circumstances mentioned in subsection (1)(a) of that section are such that a money debt arises from the obligation mentioned in section 730A(1)(b)(i) of that Act or from the exercise of an option mentioned in section 730A(1)(b)(i) or (ii) of that Act, 
 the company shall not be regarded for the purposes of the Corporation Tax Acts as having, by reason of that money debt, a relationship to which this section applies, so far as relating to exchange gains and losses.'.
 Government amendment No. 303.

Dawn Primarolo: This set of technical Government amendments to the proposed tax changes for sale and repurchase agreements—repos for short—introduced by the Finance Bill clarify the tax treatment of option premiums in a repo, and they deal with two possible instances where there might otherwise be a double charge to tax or a double deduction arising from repos. Forgive me for saying so, but amendment No. 308 duplicates the effect of Government amendment No. 303. I thank the hon. Member for Arundel and South Downs for spotting that; I therefore invite him not to press his amendment, but to share in the reflected glory of the Government amendments.

Howard Flight: I am delighted to have confirmation that amendment No. 303 deals with the problem raised by the Law Society in amendment No. 308; it will save my having to explain what the amendment was about.
 Amendment agreed to. 
 Amendments made: No. 301, in 
schedule 38, page 420, line 1, at end insert— 
 '9B (1) Section 730A of the Taxes Act 1988 (treatment of price differential on sale and repurchase of securities) is amended as follows. 
 (2) In subsection (4) (adjustment of repurchase price) for ''this section and sections 737A and 737C'' substitute ''the excepted provisions specified in subsection (4A) below''. 
 (3) At the end of that subsection add as a second sentence— 
 ''This subsection is subject to subsection (4B) below.''. 
 (4) After that subsection insert— 
 ''(4A) The excepted provisions are— 
 (a) this section, 
 (b) section 730BB, apart from subsection (6A), 
 (c) section 737A, and 
 (d) section 737C. 
 (4B) Where section 730BB(6A) has effect (repurchase price to be treated as increased or reduced for certain purposes), subsection (4) above does not have effect for any purpose other than that of determining the amount that falls to be increased or reduced under section 730BB(6A).''.'.
 No. 302, in 
schedule 38, page 421, line 29, at end insert— 
 '(6A) Where a company has a relationship to which this section applies, the repurchase price shall be treated for the purposes of the Tax Acts (other than this section and sections 730A, 737A and 737C) and (in cases where section 263A of the 1992 Act does not apply) for the purposes of the 1992 Act— 
 (a) in a case where an exchange gain arises to the company by virtue of subsection (4)(a) above or an exchange loss arises to the company by virtue of subsection (5)(b) above, as increased by the amount by which the first sum exceeds the second sum, and 
 (b) in a case where an exchange gain arises to the company by virtue of subsection (4)(b) above or an exchange loss arises to the company by virtue of subsection (5)(a) above, as reduced by the amount by which the second sum exceeds the first sum.'.
 No. 303, in 
schedule 38, page 422, line 32, leave out from 'securities),' to the end of line 35 and insert— 
 '(b) in the case of that relationship the circumstances mentioned in section 730A(1)(b) of that Act are such as to give rise to a money debt, and 
 (c) the company stands, or has stood, in the position of a creditor or debtor as respects that money debt,'.—[Dawn Primarolo.]

Howard Flight: I beg to move amendment No. 309, in
schedule 38, page 423, line 18, at end insert— 
 '17A In Schedule 26 to the Finance Act 2002 after paragraph 4, insert— 
 ''Contracts excluded by virtue of forming part of sale and repurchase agreement 
 4A A relevant contract is not a derivative contract for the purposes of this Schedule if it forms part of an arrangement falling within section 730A of the Taxes Act 1988.''.'.
 I hope that the Government amendment No. 300 addresses the same point, but I am not entirely sure. The derivatives contracts legislation in the Finance Act 2002 needs to be amended to make it clear that the Bill does not apply to options over securities when the options form part of a repo. Amendment No. 309 would ensure that the Bill does not apply to options over securities.

Dawn Primarolo: I am unable to accept the amendment, but I hope that I can help the hon. Gentleman. The amendment should not be necessary, because if a company follows the relevant accounting standards for a sale and repurchase agreement, there should be no question of an overlap with the derivative contract rules. In other instances, the amendment would go too far and take in transactions outside the scope of the derivative contract rules. However, I have asked officials to continue their dialogue with the professional bodies on the matter, in order to ensure that their interpretation is met. I invite the hon. Gentleman to withdraw the amendment while the dialogue continues, as I think that that offers the best way to resolve the matter.

Howard Flight: I am pleased to learn that the Government have taken the underlying point, and beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 307, in
schedule 38, page 423, leave out lines 26 and 27 and insert— 
 '(1) Paragraph 1 has effect where the agreement to sell securities falling within section 737A of the Taxes Act 1988 is entered into on or after 9th April 2003.'.
 This is a further Law Society point. Paragraph 1 alters the amount of interest that the repurchaser of securities under repo is deemed to pay when section 737A of the Income and Corporation Taxes Act 1988 applies. In order to avoid disturbing existing repos, there is a fair argument that the amendment should apply only to sales that took place on or after 9 April. Amendment No. 307 would ensure that the provision in paragraph 1 would not apply to sales that occurred before Budget day.

Dawn Primarolo: I am afraid that I cannot accept the amendment. If it were enacted it would mean that the Finance Bill change to end the tax losses from the anomaly would apply only to deals agreed after the announcement was made. A lot of the deals were deliberately arranged to run for a long time—20 to 30 years—to try to take advantage if the law were only changed for the future. If existing deals were allowed to escape, tax losses of at least £10 million annually would continue for many years until the deals ended. The deals also have built-in break clauses. Clearly the parties expected the Government to act, and took careful precautions against it. Market players have not complained, and a number have commented that they fully expected this provision; they were not at all surprised or caught out by the announcement. On that basis, I think that the change in the Bill is appropriate, and I ask my hon. Friends to oppose the amendment.

Howard Flight: The crucial point is whether the market would be damaged if people were taken by surprise. I have not heard huge wails of woe from the City of London, and I am, therefore, inclined to accept what the Paymaster General has said. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Schedule 38, as amended, ordered to stand part of the Bill. 
 Clause 181 ordered to stand part of the Bill.

Schedule 39 - Relevant discounted securities:

Howard Flight: I beg to move amendment No. 324, in
schedule 39, page 425, line 33, leave out from 'security' to end of line 37 and insert 
 'which is listed on a recognised stock exchange.'.
 As the Committee will be aware, the schedule is concerned with strips. It seeks to shut down a previous planning scheme that used discounted securities to generate an artificial loss on which income tax relief could be claimed. In closing down that loophole, we are concerned that it may also catch horrible situations, for example listed zeroes, in which people, 
 for whom tax relief would be appropriate, are carrying genuine losses. 
 The schedule grandfathers listed zeroes were held on 27 March 2003, the date on which the Government announced that they were closing down this planning scheme. We are concerned that the schedule could distort the surviving market for zeroes, because it will create two classes of holders: those who bought before March 2003, who will get tax relief, and everybody else. As the Government accept that listed discount securities are not part of the naughty planning arrangements, which they seek to end, would it not be reasonable to consider continuing the tax relief facility for listed securities for the original commercial reasons? If not, the schedule goes further than closing a loophole by imposing a stealth tax on bondholders.

Dawn Primarolo: An article in The Times on 7 April 2003 said:
''Accountants that deal with the affairs of the very rich concede the scheme was artificial.''
 The schedule seeks to stop widespread and aggressive exploitation of the relevant discounted securities regime by high net-worth individuals using marketed schemes. The schedule's purpose is to put the taxation of relevant discounted securities on the same footing as the taxation of normal interest-bearing securities, and to ensure European Union capability by extending the special treatment of UK gilt strips to strips of overseas Government securities. 
 I shall ask the Committee to reject amendment No. 324, which seeks to preserve the existing tax treatment of relevant discounted securities listed on a recognised stock exchange for now and in the future. The first part of schedule 39 is aimed at stopping individuals from exploiting the relevant discounted security rules to create artificial income tax losses. It also ensures that relevant discounted securities will be taxed in broadly the same way as interest-bearing securities. It does so by removing the relief for losses and expenses from most relevant discounted securities from 27 March 2003—the date of the announcement. 
 However, where a relevant discounted security was held on 26 March and was listed on a recognised stock exchange, the existing rules will continue to apply until it is disposed of or redeemed. Although securities listed on a recognised stock exchange have not yet been seen in avoidance schemes, it cannot be ruled out as a possibility, in which case acceptance of the amendment will simply result in a new generation of avoidance schemes and further Exchequer losses. In addition the amendment will maintain the tax-favoured status of investors in relevant discounted securities over those investors who subscribe to securities that pay interest. Such investors will be entitled to both capital losses and finance costs, which is unfair. I hope that the hon. Gentleman accepts that the Government's approach is correct, but if he wants to press his amendment to the vote I will ask my hon. Friends to oppose it.

Howard Flight: I was at pains to set out that the schedule will close down a tax planning scheme. The Paymaster General did not answer my points about zeroes. Have the Government thought about how the market will operate when there are two different
 classes of holders? I will ask the Government and the Revenue further to consult with the industry specifically on the issue of zeroes, which are not part of the tax planning scheme to which the Paymaster General and I have referred. My point is obscure, but it has not been adequately addressed. In the interests of time, however, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Question proposed, That this schedule be the Thirty-Ninth schedule to the Bill.

Howard Flight: May I just make one other point on the schedule, which was raised by the Law Society? The schedule is somewhat unhelpful to users, not least because the standard tax handbooks do not reproduce section 47 of the Finance Act 1942 to which it refers. The definition of ''strip'' should be replaced by a self-contained definition that does not cross-refer to another provision.

Dawn Primarolo: The hon. Gentleman is making an observation about ensuring proper communication and drafting. I will certainly examine his point, which, as he rightly says, is rather obscure, but it will take a little time to do so.
 Schedule 39 agreed to.

Clause 182 - Court common investment funds

Question proposed, That the clause stand part of the Bill.

John Burnett: Is this clause 183?

Nicholas Winterton: No. Not for the first time the hon. Gentleman has jumped the gun.

John Burnett: May I say that at this end of the Room one cannot always hear what is going on at your end of the Room, Sir Nicholas?

Nicholas Winterton: People often query what I say but not the volume at which I say it.
 Question put and agreed to. 
 Clause 182 ordered to stand part of the Bill.

Clause 183 - Authorised unit trusts, OEICs and common investment funds

Question proposed, That the clause stand part of the Bill.

Howard Flight: The provisions are welcome and will improve the operation of markets, but why have they been restricted to particular categories of collective investment? Are the Government considering extending them to all collective investments including investment trusts?

John Burnett: Those who benefit from the clause will welcome it. It is the only clause in the Finance Bill on inheritance tax. Can we address inheritance tax in general terms? The nil-rate band has been increased from £250,000 to £255,000. The increase is small and the tax catches more and more people, who are invariably not well-off by most standards. Inheritance
 tax is a tax levied on those who do not have sufficient money or assets to avoid it legitimately. Will the Paymaster General tell the Committee whether the Government have any proposals in relation to inheritance tax? Will she please let us know whether they intend to consult on it?

Dawn Primarolo: I assure the hon. Gentleman that I will certainly keep him informed of developments in due course.

Howard Flight: Since the wider issue has been raised, will the Paymaster General focus on inheritance tax relief applying to private companies, which should be designed to allow them to keep going and not close down because of what they have to pay? There are satisfactory arrangements for trading companies, but there are increasing issues concerning definitions of trading, investment and property that the hon. Member for Torridge and West Devon (Mr. Burnett) touched on earlier. Although I know that it is a difficult territory, some of the concepts are now out of date and worth revisiting. The Paymaster General will be aware of correspondence that she has had on that issue. I hope that she will also examine the agenda of modernising IHT so that it does not damage the economy.

Dawn Primarolo: I am extremely grateful to the hon. Gentleman for advising me where I should settle on the tax system next in preparing the pre-Budget report, and I shall certainly pass on his comments to the Chancellor.
 Question put and agreed to. 
 Clause 183 ordered to stand part of the Bill.

Clause 200 - Authorised unit trusts:

Question proposed, That the clause stand part of the Bill.

Howard Flight: This clause is welcome and the industry has been pressing for it.
 Sitting suspended for a Division in the House. 
 On resuming—

Howard Flight: I apologise for returning late, Sir Nicholas, I was waiting for another vote. I am sorry to have inconvenienced you and the Committee.
 It is appropriate to raise the relevant issue of stamp duty on fund mergers. The industry has discussed that with Government but has so far had no response. There is a general view that there are too many funds, and the Heinemann report highlights the removal of barriers to mergers as a key ingredient of cutting costs for consumers in the industry. The Treasury has endorsed that idea in the context of Heinemann, so I ask the Economic Secretary whether the Government are proposing to address that issue as part of their 
 programme to open markets and make the industry more competitive.

John Healey: The clause makes it easier for foreign investors to receive their interest distributions from UK-authorised unit trusts and open-ended investment companies without reduction of tax. Like clause 183, it applies from 16 October 2002 and will allow UK funds to compete more effectively with their overseas counterparts. Entitlement to gross payment currently depends on the completion of non-residence declarations by foreign unit holders. That is often an onerous and off-putting process. The clause extends entitlement to pay gross, first, in cases where the interest is paid through a reputable intermediary and the fund manager has reasonable grounds for believing that the unit holder is entitled to gross payment; and, secondly, where the investor is a company or the trustees of a unit trust scheme.
 The short and simple answer to the question asked by the hon. Member for Arundel and South Downs is that we keep policies, including those relating to fund mergers, under close review. The provision allows UK fund managers to compete on an equal footing with their overseas counterparts in other jurisdictions. Taken together with clause 183, it gives UK fund managers a valuable boost in competing overseas. I commend it to the Committee. 
 Question put and agreed to. 
 Clause 200 ordered to stand part of the Bill. 
 Clauses 185 to 190 ordered to stand part of the Bill.

Clause 191 - Higher rate of tax: divided companies

Question proposed, That the clause stand part of the Bill.

Stephen O'Brien: I am glad that we have been able to dispatch our business so quickly and arrive at the only clause that deals with insurance premium tax. There is broad relief that, despite a report in The Times prior to the Budget announcing the possibility of a 1 per cent. increase, an increase was avoided. I have a few points and observations to make in the context of supporting and welcoming the clause.
 The clause amends schedule 6A of the Finance Act 1994, which was inserted by the Finance Act 1997 under the last Conservative Administration. Section 51A and schedule 6A in the 1997 Act were brought in to prevent the avoidance of VAT by sellers of second-hand cars and household appliances, who would sell goods at a relatively low profit margin coupled with breakdown insurance at a high profit margin, exploiting the fact that, although the supply of goods was subject to VAT, the supply of breakdown insurance was subject only to insurance premium tax. 
 Section 51A provides that the premiums for insurance falling within paragraphs 2 to 4 of schedule 6A should be subject to insurance premium tax at the higher rate of 17.5 per cent. Paragraph 2 relates to insurance provided by the supplier of a vehicle or a person connected with them. The vehicle is a car or motor bike; the provision does not include 
 commercial vehicles—recall the discussion that we had on various aspects of the petroleum tax—nor my beloved ex-services Austin K9 vehicle. Paragraph 3 relates to insurance provided by the supplier of an appliance, or a person connected with them. Paragraph 4 relates to insurance against travel risks, no matter who the supplier is, hence travel insurance is not covered by the changes made by clause 191, except when it is provided free of charge. It is notable that it was announced the other day that travel insurance is not to be regulated when sold through and by travel agents, which obviously raises other issues. 
 By concession, the higher rate of insurance premium tax is not applied to ''ordinary motor insurance'' sold by car or motor cycle dealers as opposed to breakdown insurance. Also by concession, insurance premium tax at the higher rate is not applied to home contents insurance sold by retailers of domestic appliances. That was recorded in a Customs and Excise news release on 6 February 1997. 
 Clause 191 is intended to prevent the avoidance of liability for insurance premium tax at the higher rate when a divided company provides insurance. A divided company, which, as paragraph 12 of the explanatory notes on the clause explains, is known in some jurisdictions as a protected cell company, contains segregated compartments within it called cells. The cells can be owned and run independently of each other—their assets and liabilities being segregated—the result being that the person who owns and controls a particular cell may not control the company as a whole so as to make it connected with him. Accordingly, by providing breakdown insurance through wholly-owned cells of protected cell companies that they do not control, motor dealers and retailers of domestic appliances have been able to avoid paying insurance premium tax at the higher rate on the premiums for that insurance. 
 Although I support and understand the clause, I have a point to make in relation to drafting. There is no amendment proposed; I just want the Economic Secretary to take note. The new rules apply when any division of the divided company is connected with a—that is any—supplier of cars, motor bikes, or appliances. In theory, that could catch insurance provided by someone having no relationship with a supplier, provided that they were connected with another supplier. Although as a practical matter such a situation is likely to be rare, theoretically the drafting might reflect that more elegantly. The original legislation was widely drafted in that it covered the provision of insurance by a person connected with any supplier of cars, motor bikes and appliances. 
 The Institute of Chartered Accountants in England and Wales noted that the clause is described as an anti-avoidance measure and accepts the logic behind it. However, it noted that the case of Gil Insurance and others—case C-308/01—is currently before the European Court of Justice. That case raises issues about whether the UK higher rate of insurance premium tax is lawful under European VAT law, whether is it unlawful state aid, and, if so, whether it should be repaid to those businesses required by UK law to charge it. 
 The Institute of Chartered Accountants in England and Wales has stated: 
''We note that the Court of Appeal in the 1999 Lunn Poly case [1999] STC 350 has already decided that the differential rates of insurance premium tax constituted a state aid under the EU Treaty, and since the European Commission had not been notified nor given its approval, the differential rates were illegal.
If Customs are unsuccessful in the ECJ case, the risk must be that clause 191 will also be ruled unlawful. We believe that this clause should be withdrawn pending the decision in that case.''
 The Conservatives have not adopted that approach but wish to establish what the Economic Secretary has in mind and what his officials advise him is the status of the clause in the light of that particular case. Customs is contesting it, and the case is currently before the European Court of Justice. I look forward to his response.

John Healey: I am grateful for the generous support of the hon. Member for Eddisbury for the clause. The Institute of Chartered Accountants of England and Wales raised a question with him about a court case. It is true that the legality of the higher rate has been challenged on several counts and that a case is due to be heard by the European Court of Justice. Customs and Excise remains confident of its case. The measure is not relevant to the case, so I am glad that the hon. Gentleman is not arguing that we should withdraw the provision pending the outcome of the case.
 A common provision and a common purpose in parts of this Finance Bill, as in all previous Finance Bills, is to try to close loopholes in our tax legislation to prevent avoidance and revenue leakage. This is one such clause. As the hon. Gentleman reminded members of the Committee in a technical and detailed description of the background to IPT, the Government in 1996 announced that a new, higher rate of IPT would be introduced, in part to counter the tax distortion arising from contract restructuring when insurance was sold alongside certain goods. The higher rate was intended to apply when certain types of insurance are sold by the supplier of the goods or by what is described in the legislation as ''connected persons''—usually where one company has a controlling interest in another company. 
 The clause revises the definition of connected person to include what are described in the legislation as divided companies. The main purpose of the change is to ensure that the higher rate IPT legislation applies equally to insurance sold by bodies such as protected cell companies. PCCs contain cells that can be owned and run independently and whose assets and liabilities are segregated from the assets and liabilities of other cells as well as the non-cellular or core assets and liabilities of the company. That means that someone could own and run an individual cell but have only a minority interest in the PCC as a whole. Insurance provided by the PCC with certain goods could escape the higher rate of IPT because the cell did not fall within the existing definition of a connected person. 
 We have successfully identified and are now closing a potentially damaging loophole before significant amounts of revenue can be put at risk. The action is needed, and I am glad that the hon. Member for 
 Eddisbury welcomes it. On that basis, I commend the clause to the Committee. 
 Question put and agreed to. 
 Clause 191 ordered to stand part of the Bill.

Clause 192 - Companies acquiring their own shares

Howard Flight: I beg to move amendment No. 325, in
clause 192, page 124, leave out lines 27 to 38 and insert— 
 '(6) Where any shares of a company are subject to a transaction which falls, or would fall, within the scope of sections 126 to 131 of the Taxation of Chargeable Gains Act 1992 (company reorganisations etc) or any enactment applying the said section 126 in a modified form (together ''the relevant enactments''), and that company holds any of its own shares (''the treasury shares''), then the relevant enactments shall apply to those shares which are not treasury shares ignoring the effect of the transaction (if any) upon the treasury shares.'.
 The stated intention of the clause is to put companies that purchase their own shares to be held in treasury in the same position as companies that purchase their own shares and immediately cancel them. First, we would like to know why there is an additional £5 fixed stamp duty cost on the subsequent cancellation or transfer of shares held in treasury in addition to the 0.5 per cent. charge on the repurchase itself. 
 Broadly, it seems that the Government have made a meal of the introduction of treasury share legislation. Amendment No. 325 is designed to simplify the approach and to reflect that the Bill ought to say that treasury shares are invisible for tax purposes and not treated as an issue, hence the capital gains tax tests for reorganisation relief. They should be ignored.

Jonathan Djanogly: After hearing my hon. Friend talk about the £5 fixed stamp duty, I thought that I would voice my own concerns about it. It might seem an acceptable or de minimis amount, but why is there any stamp duty at all when for other tax reasons—outlined in other parts of the Bill—a buy-back of shares into the treasury is to be treated as an issue of shares? Normally, there is no stamp duty on an issue. There used to be, some 10 or 15 years ago. One is left to wonder whether this measure is a way that the Government has found to bring back stamp duty on an issue of shares via the back door.

Dawn Primarolo: Perhaps I should concentrate on the £5 fixed duty charge. That charge is consistent with circumstances in which a transfer is treated as otherwise than on sale. For example, it also applies to an instrument transferring shares to a nominee. Stamping a document with a fixed duty enables the Stamp Office to confirm that the sale of the share is not subject to ad valorum duty, which helps to provide certainty.

Jonathan Djanogly: Will the Paymaster General give way?

Dawn Primarolo: The hon. Gentleman will find my next sentence very helpful. Perhaps he will remain in his seat for just one moment.
 If there are concerns that the measure will cause difficulty in particular circumstances—although we are aware of no such difficulty—I suggest that the bodies concerned enter discussions with Revenue officials so that the issues can be aired and a way forward found. There is a perfectly rational reason for the stamp duty, which I have explained. It is difficult to deal with concerns that are raised in a Committee before representations and discussions with officials. I am not complaining, but I suggest that those who can demonstrate those difficulties should bring them forward now to the Revenue officials so that they can be discussed.

Jonathan Djanogly: Are we not talking about a matter of principle? Stamp duty should not be paid on the issue of shares. If the Paymaster General is saying that she is going to change that principle, she should be up front about it. If something is not subject to stamp duty, one could still have a stamp that says, ''Not subject to stamp duty''.

Dawn Primarolo: I do not think that the hon. Gentleman was listening to what I just said. I do not agree with him on his point about a principle. He has raised something that he says is a problem and a matter of principle. I have said that I do not agree. Then, the argument is advanced that there will be difficulties. Quite reasonably, I have extended the suggestion that those who have difficulties must make representations to the officials concerned, so that we will be able to go forward in a rational and sensible way. I have no intention of accepting amendments on the basis of no information and no discussion with officials. I ask the hon. Member for Arundel and South Downs to withdraw the amendment, so that discussions can take place. If he does not, I will ask my hon. Friends to oppose it.

Howard Flight: Even if they were a little aggressive, I welcome the Paymaster General's comments. There are practical points to be addressed. However, on the basis of the undertaking that they will be examined, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn.

Howard Flight: I beg to move amendment No. 326, in
clause 192, page 125, line 10, after 'treated', insert 
 'for the purposes of Part 6 of the Taxes Act 1988'.
 This is a Law Society amendment to clarify the application of the clause and schedule. The Law Society and others raise the question of whether the clause is necessary. They feel that the interpretation of section 126(7) of the Taxation of Chargeable Gains Act 1992 may be incorrect. They point out that bonus shares do not have to be issued on a pro rata basis, and that if clause 192(6) is required, it needs to provide that it does not prevent the issue of new shares from being ''an issue''. 
 In particular, the Law Society does not understand the purpose of clause 192(7). It is unclear about the intended position of a scheme of reconstruction that is intended to fall within section 136 of the 1992 Act that involved a target company that held some of its shares in treasury. The society feels that it would be helpful if clause 192(8) were to provide for what purposes the 
 share capital of the treasury shares had been disposed of and that it should be treated as if it were an amount equal to the value of that consideration. They take the view that the purposes for which the share capital is to be so treated are probably the purposes of Part VI of the Taxes Act 1988, but they do not believe that clause 192(8) is intended to apply to the purposes of determining the percentage of ordinary share capital that one company owns in another company for the purposes of the various grouping tests. 
 In short, treasury shares should be a relatively straightforward issue. However, although they are well intended provisions, the professional reaction to them has been to question their clarity and whether some of the measures are necessary.

Dawn Primarolo: I am grateful to the hon. Gentleman for seeking to clarify the application of that aspect of the clause. Clause 192(8) has no relevance to the determining the amount of ordinary share capital. Share capital is something quite different. However, we have identified that the amount of share capital is relevant to one of the tests for the company control. We did not intend that the sale of shares out of treasury at below nominal value should change the amount of share capital for the control test. I therefore agree, but for slightly different reasons to those put forward by the hon. Gentleman, that that aspect of the clause is relevant only to Part VI of the Taxes Act 1988.
 I am grateful to the hon. Gentleman for drawing a minor technical inconsistency to my attention. I am therefore pleased to recommend to the Committee that the amendment be accepted. 
 Amendment agreed to. 
 Clause 192, as amended, ordered to stand part of the Bill.

Schedule 40 - Acquisition by company of its own shares

Question proposed, That this schedule be the Fortieth schedule to the Bill.

Jonathan Djanogly: I am not sure that I shall get the same reaction from the Paymaster General as the previous amendment got. I and many in the business world welcome the Government's initiative in bringing forward the treasury regime. It will make the manipulation of share capital much easier and it will become more compatible with American procedures. However, various questions arise.
 Stamp duty on a company's acquisition of its own shares is dealt with in paragraph 5. When a company purchases its own shares it is exempt from stamp duty, which is fine. Something that comes up in that paragraph is the £5 fixed stamp duty. We discussed that under the previous clause, so I shall not go over it again, except to say the provisions look like tax and stamp duty on the issue of shares via the back door. 
 Stamp duty of 1.5 per cent. will now be chargeable if the treasury shares held by the company are transferred to a person whose business is using depository receipts or providing a clearance service. I am not entirely sure why stamp duty in that case is 
 more than 0.5 per cent. There may be a good reason for that, and I would appreciate it if the Minister explained. Perhaps I am missing something, but if not, could a company not issue more shares than the institution concerned and pay zero stamp duty instead of selling that same institution its treasury shares, which would therefore result in stamp duty of 1.5 per cent.? The provisions seem to be inconsistent in that respect. If there is a point to be made in connection with that, I am concerned, because it looks as though the provisions will act as an obstacle to the whole concept of treasury shares before they even exist. I should therefore be grateful for the Minister's comments.

Dawn Primarolo: The schedule and the associated clause provide for the tax consequences following changes made in company law by regulations. Those changes will allow listed companies to purchase their own shares, hold them, and subsequently sell them back into the market or cancel them. Shares held in that way are often referred to as treasury shares. The tax measures are necessary to ensure that own shares purchased by a company will be treated in the same way for tax purposes, irrespective of whether they are purchased and immediately cancelled. When the company sells the shares or transfers them to an employee share scheme, they are treated for tax purposes as if they were a new issue of shares. The new rules make no changes to the tax treatment of own shares purchased and immediately cancelled. The measures are part of a package to give listed companies additional flexibility to manage their capital efficiently, so of course I commend the schedule to the Committee.
 The hon. Gentleman asked about the stamp duty charge in relation to a company purchasing its own shares. No stamp duty is payable when shares are issued by a company, so if there were no charge when a company purchased its shares, individuals could avoid stamp duty by the company purchasing the shares from the seller, then issuing new shares to the purchaser. The stamp duty charge removes the scope for avoidance and the provisions ensure that the stamp duty treatment for shares purchased and held in treasury is the same as currently applies to shares purchased and cancelled. 
 The hon. Gentleman also asked about the 1.5 per cent. duty. That is the normal entry charge for shares that are issued on or transferred to a depository bank. From that the shares are then transferred tax free, which is the interaction of the two relevant measures. 
 Question put and agreed to. 
 Schedule 40 agreed to. 
 Clause 193 ordered to stand part of the Bill.

Schedule 41 - Companies in administration

Howard Flight: I beg to move amendment No. 295, in
schedule 41, page 428, line 21, at end insert— 
 '(7ZB) For the purposes of this section an administrator (who is the proper officer of a company) may elect that subsections (3)(da) and (7ZA) do not apply. 
 (7ZC) An election under subsection (7ZB) must be made— 
 (a) in writing, 
 (b) to the Inland Revenue, 
 (c) no later than one year after the date the company enters administration. 
 (7ZD) An election under subsection (7ZB) is irrevocable.'.

Nicholas Winterton: With this it will be convenient to discuss the following:
 Amendment No. 296, in 
schedule 41, page 428, line 23, leave out '(7ZA)' and insert '(7ZD)'.
 Amendment No. 327, in 
schedule 41, page 428, line 26, at end insert— 
 '(1A) In subsection (1), after ''liquidator'' insert ''or administrator''.'.

Howard Flight: The Government will be aware that there has been a fair amount of unhappiness among the professions about the arrangements in the schedule. There is a view that the schedule makes matters more difficult for those sorting out companies in administration.
 We have here another piece of legislation that is, essentially, raising more tax. The provisions of paragraph 1 will bring the accounting period of a company to an end on the appointment of an administrator, which will restrict the ability of the company to set off trading losses in the accounting period in which the administrator is appointed against chargeable gains realised following the appointment. That will aggravate the problem that arises when a company goes into liquidation—trading losses brought forward are not available for set-off against chargeable gains arising on the disposal of fixed assets of the trade by the liquidator. 
 The availability of group relief will also be adversely affected, and such problems might have a significant impact on the ability of creditors to recover their debt from a company in administration. There is a view that the provision constitutes a retrograde step. 
 Paragraph 9 amends the loan relationship legislation. Under the revised definition of control, which is contained in section 87A of the Finance Act 1996, it is probable that a company would lose control of a subsidiary that went into administration or liquidation. That could make it difficult to restructure the inter-company borrowings that had been made by that company as it would no longer be connected with the lender, on the basis that it would no longer be controlled by the ultimate parent company within the meaning of section 87A. Thus, any release of the loan would be held to constitute a taxable receipt. That is an existing problem that will be exacerbated once the change to the taxation of companies in administration comes into force. A legislative change is required to ensure that a borrower would continue to be connected in such cases, or at least to ensure that it would only be taxed on the release of the loan relationship to the extent 
 that the lender was able to obtain bad debt reliefs for losses arising after the connection ceased. 
 We also feel that a reference to the administrator needs to be added to section 108(1) of the Taxes Management Act 1970. I shall come to that in a minute. Finally, while the changes are recognised as being necessary as a result of the introduction of the Enterprise Act 2002, the legislation does not seem to deal with the position in which a company in liquidation subsequently moves into administration. Under the current system, a company going into liquidation loses beneficial ownership of its assets, whereas one going into administration does not. If, under the new system, a company loses ownership of its assets on commencement of liquidation, what will happen to its assets if it subsequently goes into administration? If it continues to have lost ownership of its assets, its position will be worse than it would have been had it not first been in liquidation. The issue needs to be clarified. 
 The general view, and that reflected by our amendments, is that the proposed changes to section 12 of the Taxes Act 1988, dealing with corporation tax and the periods of assessment, are unnecessary, could be unfair and might result in unplanned tax liabilities. They will add a layer of complexity to the taxation treatment of companies in administration that could deter creditors from using the administration process. Our amendment provides that section 12 should remain unchanged, or, alternatively, that its introduction should be delayed until the Revenue has had an opportunity to consult further. As an alternative, to prevent companies from being disadvantaged, the legislation could be amended to provide administrators with the right to make an election to disapply the new changes to section 12 that are introduced by the Bill. That would have the effect of ensuring that companies in administration were treated for tax purposes on the same basis as solvent companies. Dropping the proposed changes or permitting an election to disapply the proposed new provisions would ensure taxation on the same basis as a solvent company. One year should be long enough for the administrator to consider the company's tax position and to make an election. Those points relate to amendments Nos. 295 and 296. 
 Amendment No. 327 aims to add reference to an administrator, and raises a Law Society point. A reference to the administrator needs to be added to section 108 (1) of the Taxes Management Act 1970 so that the rule that everything done by a company may be done through any person with the express, implied or apparent authority of the company does not apply when an administrator has been appointed. 
 Finally, it seems to me and to many professionals that the arrangements have not been fully thought through. I do not know whether the Government wish to come back on any of the amendments, but this is an aspect of the Bill that is in no way party political.

Dawn Primarolo: I thank the hon. Gentleman for moving the amendments because he has given me the opportunity to address concerns about measures for companies in administration. Before I raise the hon. Gentleman's hopes too high, I must tell him that I will
 not accept the amendments. However, I hope that he will find my words helpful.
 The intention behind the clause and the schedule is to improve the environment for companies in administration, and not to try to extract additional corporation tax from them. That is why the measures were assessed as neutral to the Exchequer. Amendments Nos. 295 and 296 aim to provide an optional let-out from the new rules on company accounting periods for companies where it is perceived that the old rules would be more advantageous. There are a number of problems with that. First, any perceived tax advantage under the old rules was anomalous and uncertain. For example, there could have been a tax advantage if the date when a company went into administration happened to be in the middle of an accounting period, but not if that date was earlier in the accounting period. 
 Secondly, the amendments do not recognise the fundamental changes in the duties and responsibilities of administrators made by the Enterprise Act 2002. Consequently, they are likely to undermine the better environment that we are trying to put in place for companies in administration. In particular, administrators will be able to make distribution to creditors. Consequently, it is necessary to clarify tax law on the responsibilities of administrators for corporation tax. The draft rules that were published last week by the Insolvency Service will bring administrations broadly in line with liquidations. Those rules were developed in consultation with a wide range of interested parties, including the insolvency profession. 
 To ensure the proper attribution of responsibility for tax matters, we need a clean break between the tax arising during the period of administration, and tax arising for prior or subsequent periods. Without such a rule, tax arising on pre-administration activity could become an expense of the administration, resulting in less money for return to creditors. Although well intentioned, the amendments would cause more damage than the perceived difficulties that the hon. Gentleman identifies. I urge him to consider withdrawing the amendments. If he does not, I will ask my hon. Friends to oppose them. 
 I appreciate that amendment No. 327 is intended to be helpful. However, I am sure that the hon. Gentleman will be minded to withdraw it after I explain why I must oppose it. The proposals would marginally increase administrators' tax responsibilities, but do not require administrators to perform those duties. They may still be delegated to a company's tax department or a company secretary. On the other hand, the amendment would require the administrator to personally look after the company's tax affairs. In other words, he will not be able to delegate responsibility for the company's tax affairs. That would be an unnecessary burden on administrators for no real gain. If an administrator felt that he or she wanted to retain control of those matters, he or she could make it clear that no one else had authority to act on behalf of the company. An administrator could still dismiss errant directors or other employees. 
 The disadvantages of the amendments outweigh the advantages. I cannot accept them, and I will ask my hon. Friends to oppose them, but over the next few months the Inland Revenue will engage in dialogue with the insolvency profession on a number of issues, including some of those that the hon. Gentleman has raised. That could provide an opportunity properly to consider the evidence on the effects of tax on decisions taken about insolvent companies. That could possibly lead to measures next year dealing with all forms of company rescue, which would be a much better way to proceed. 
 The hon. Gentleman mentioned loss of control and company loan legislation. There is no change of treatment here, merely the use of new terms. Having acknowledged the importance of the points that he has raised, explained the difficulties of the amendments and explained how the Revenue intends to proceed with the insolvency profession to address these issues, I hope that the hon. Gentleman will agree to withdraw the amendments. If he feels unable to, I shall ask my hon. Friends to oppose them.

Howard Flight: I thank the Paymaster General for her constructive response. As I said, we are aware that the need for this legislation results from the Enterprise Act 2002. I repeat my point: we do not believe that that legislation deals with the position in which a company in liquidation subsequently moves into administration. However, on the basis of the continuing consultation to which she referred, we do not want to press the amendments. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Schedule 41 agreed to.

Clause 194 - Exchange of information between tax authorities of member states

Howard Flight: I beg to move amendment No. 207, in
clause 194, page 126, line 16, leave out 
 'any of subsections (1) to' 
 and insert 
 'the definition of ''the Mutual Assistance Directive'' in subsection'.

Nicholas Winterton: With this it will be convenient to discuss Government amendment No. 304.

Howard Flight: The power given to the Treasury under subsections (5) and (6)(b) is, we feel, inappropriate. Any amendments to the legislation in this territory should be dealt with in primary legislation, or at least through the positive resolution procedure. The disclosure of information raises issues of human rights, confidentiality and information covered by legal professional privilege. We suggest that those are too important to be left to secondary legislation.
 Amendment No. 207 addresses that. It is obviously practical to give the Treasury power to amend the definition of the mutual assistance directive in subsection (4) in case additional or replacement directives are brought in, but it is much less clear that it is appropriate for the Treasury to be able to alter the safeguards in subsections (2) and (3).

Dawn Primarolo: It may help the Committee if, before turning to amendment No. 207, I first briefly explain the purpose of the clause. As Committee members will recall, the EC mutual assistance directive originally introduced in 1977 is the main European legislative instrument enabling the exchange of information between member states on the administration of taxes. That includes VAT and excise duties.
 The mutual assistance directive is set to change in January 2004, most notably to extend its scope to include the exchange of information on taxes on insurance premiums. Also, from the start of 2004 a new VAT administrative co-operation regulation will be introduced, replacing all existing provisions relating to VAT and providing the sole legal base for the exchange of information relating to VAT administration. Those legislative changes reflect unanimous agreement reached between member states earlier this year on measures to improve the speed and flow of information exchange as part of a joint effort to help to counter indirect tax fraud and evasion. Those changes and any similar future changes will require consequential amendments to the legislative references and definitions in current UK legislation. The clause provides powers to make those and similar future amendments simply and speedily by means of a statutory instrument. 
 The clause replicates and consolidates the existing UK legislation relating to mutual assistance, which was first introduced in 1978 and amended in 1980 and 1992, authorising the UK tax authorities to provide information when it is required under the mutual assistance directive. It also updates UK legislative references and allows for the new consolidated section and the amended section 48(lB) of the Value Added Tax Act 1994 to be varied by Treasury order. Amendment No. 207 would impose unnecessary limits on the scope of the planned power to amend that section by Treasury order. The power to change subsections (1) to (3) by order is desirable, because it will enable the House to make changes without recourse to primary legislation outside the Finance Bill timetable. Any changes would be in a limited area and would already have been exposed to the House as part of the normal European negotiating process. 
 Having brought together the current mutual assistance provisions, it is important that they can be readily updated and kept internally consistent as and when developments occur. In recognising that it is reasonable and sensible to retain order-making powers in respect of subsection (4), we acknowledge that such powers provide for flexible and responsible use of parliamentary time. The amendment draws a distinction between elements of that consolidated package and is unhelpful in that it would impose unnecessary and unreasonable limits on the Government's ability to make minor legislative changes. Nevertheless, I recognise that the Opposition are genuinely concerned about the use of the order-making power as originally envisaged. The Government would prefer the flexibility offered by the clause as originally drafted, but in the interests of not 
 delaying progress of the Bill I am prepared to give way on that point and accept the amendment.

Howard Flight: I do not know what to say. I am heartened to note that the Paymaster General appreciates the human rights issue and I thank her.
 Amendment agreed to. 
 Amendment made: No. 304, in 
clause 194, page 126, line 19, at end insert— 
 '( ) An order under subsection (5) shall be made by statutory instrument which shall be subject to annulment in pursuance of a resolution of the House of Commons.'.—[Dawn Primarolo.]
 Clause 194, as amended, ordered to stand part of the Bill.

Clause 195 - Arrangements for mutual exchange of tax information

Question proposed, That the clause stand part of the Bill.

Howard Flight: The clause allows information to be exchanged under bilateral agreement with other states to prevent tax avoidance when it is
''foreseeably relevant to the administration or enforcement of''
 the relevant legislation. Concern has been expressed to us that the new test of what information is appropriate to exchange is both broader and more subjective than the necessary test that it replaces and has been extended without prior consultation by analogy to how ''necessarily'' is construed for the purposes of section 198. The change could be damaging to taxpayers. 
 There is also a question whether it is lawful for the UK unilaterally to make changes to existing double taxation treaties and when some degree of retrospection may be involved. Even if a case can be made for broadening the scope to provide information from tax administrators in the future, an attempt to do so for the past is a cause for concern. Not all the 106 UK treaty partners enjoy the high standards of government that we enjoy, and there are concerns that the retrospective element is contrary to the Human Rights Act 1998 and article 8 of the convention. There is a view that the clause should be withdrawn.

Dawn Primarolo: I do not agree with the hon. Gentleman. It is important that the UK continues to include the Organisation for Economic Co-operation and Development published model agreement on exchange of information in tax matters, and the UK prides itself on being at the forefront of the drive to promote tax information exchange on as wide a basis as possible. It is therefore only right that the UK takes the first opportunity to bring its own rules in line with the current international standards as agreed by members of the OECD and non-OECD economies.
 With regard to the hon. Gentleman's point about a wider interpretation of ''necessary'', I do not think that he makes a valid comparison. The meaning of all legislation must be considered in context. The context of the existing vires, and the exchange of information, requires a broad interpretation of ''necessary''. The 
 commentary on the OECD model double taxation article on exchange of information states that some countries replace ''necessary'' with ''relevant'' in their bilateral conventions, regarding that as a better way to express the sense of the provision. In the view of the OECD, either word may be used in that context. 
 The purpose of the new wording in clause 195 clearly better reflects the reality of what we and our international partners do in practice. That is why we want to adopt it. On this occasion I cannot agree with the hon. Gentleman. The wording is not contrary to the Human Rights Act 1998. We have considered that and we are satisfied that exchange of information powers are consistent with the Act.

Howard Flight: We shall have to agree to differ, but I do not intend to waste precious time putting the matter to a vote. I close by saying that I hope that the Government have considered whether unilateral changes to existing double taxation treaties may present a legal problem.
 Question put and agreed to. 
 Clause 195 ordered to stand part of the Bill.

Clause 196 - Savings income: Community obligations and international arrangements

Howard Flight: I beg to move amendment No. 200, in
clause 196, page 127, line 7, after 'made', insert 'after consultation and agreement'.

Nicholas Winterton: With this it will be convenient to discuss the following:
 Amendment No. 289, in 
clause 196, page 127, line 43, at end insert 
 ', being a description in respect of which the Community obligation or arrangements referred to in subsection (1) above apply.'.
 Amendment No. 328, in 
clause 196, page 127, line 44, at end insert 
 ', being a description in respect of which the Community obligation or arrangements referred to in subsection (1) above apply,'.
 Amendment No. 288, in 
clause 196, page 127, line 41, after 'for', insert 'the immediate benefit of'.

Howard Flight: The clause gives broad authority to the Treasury to make regulations to implement the savings directive. The implementation of exchange of information is a matter that should be addressed by Parliament and the secondary legislation approach is inappropriate, particularly as little attention has been given to taxpayers' safeguards. In principle there is an argument for redrafting the clause so that any legislative provisions that relate to exchange of information could be debated in Parliament.
 We also note that there may be practical difficulties in the paying agent identifying whether the recipient is a UK resident. Specifically, amendment No. 200 has been requested by the overseas territories, which are concerned about the imposition of the EU savings tax directive without ongoing consultation, and limited discussion and negotiation. By constitutional convention the UK Government have avoided imposing financial regulations on overseas territories 
 because their citizens have no democratic representation in the UK. On this occasion the point has been put that the Treasury is threatening to part with that convention and impose the EU directive. The aim of amendment No. 200 is to ensure that the Finance Bill does not give the Treasury the power to impose the directive by Order in Council without the agreement of the territories. The amendment would require the UK Government to consult and agree next steps with the overseas territories. 
 I could give a longer and more detailed description of the concerns raised by the amendments, but given the time, I shall reduce that to putting some questions. Will the Paymaster General make it clear that the Treasury will undertake a regulatory impact assessment to assess the directive's impact on overseas territories? Will she make it clear that the directive will not be forced on overseas territories by an Order in Council without consultation? 
 Turning to amendment No. 288, under subsection (8) a person is treated as making 
''savings income payments to another person''
 not only if he 
''makes payments of savings income to the other person''
 but if he 
''secures the payment of savings income for the other person'',
 in other words, acts as a collecting agent. That reflects the wording of article 4.1 of the draft directive, which defines ''paying agent'' as an 
''economic operator who pays interest to, or secures the payment of interest for the immediate benefit of, the beneficial owner''.
 Subsection (8) does not contain such a reference to the securing of payment for the immediate benefit of the beneficial owner. That will presumably be reflected in regulations. That could be an important point, because the idea is that only the last economic operator in a chain of intermediaries should be required to provide information. Amendment No. 288 is really a probing amendment on that point. 
 Amendment No. 289 picks up the point that the intended scope of the directive is summarised in the commentary on article 4 of the EU Commission's proposals for the directive. Some clarification of the meaning in subsection (8)(b) of securing the payment of savings income would be helpful. The relevant section, 118C, of the Taxes Act 1988 set out in some detail who would be a collection agent, and in relation to what income. It seems unclear whether clause 196(8) is intended to catch functions other than that set out in paragraph 3 of table B in section 118C of the 1988 Act. 
 On amendment No. 328, clause 196(9) defines ''savings income'', in a definition that seems somewhat broad. It is defined as meaning interest subject to the possibility of certain categories being prescribed as not included or 
''other sums of a prescribed description.'' 
The reason for that is that, under the directive, certain capital transactions such as sales of interests are notifiable. Nevertheless, it might have been better expressly to limit the power of prescription to sums falling within the ambit of the directive. A similar 
 point can be made in relation to the definition of ''relevant payees'', as the directive is meant to apply to individuals, whereas clause 196(10) refers to ''persons''. Amendment No. 328 is, in essence, a probing amendment to pursue that point.

Dawn Primarolo: Clause 196 provides for a scheme to help to counter tax evasion on cross-border payments of savings income by individuals. The scheme will enable us to implement the savings directive that was adopted at ECOFIN on 3 June this year.
 The clause provides for the detailed rules of the scheme to be set out in regulations, and it sets out what the regulations may cover. Subsection (1) is the key provision, which determines the scope and purpose of the regulations. That subsection means, as I will make clear, that the four amendments are unnecessary. They all seek to limit the scope of the clause and the regulations that can be made under it. I want to explain, in a very little detail, why the clause already provides the safeguards that the hon. Gentleman seeks. I hope that he will then withdraw the amendment. If not, I shall ask my hon. Friends to reject it. 
 Subsection (1) limits the circumstances in which any regulations can be made to issues arising from Community obligations and from arrangements with other territories that are intended to ensure the effective taxation of savings income in the United Kingdom or the other territory. The rest of the clause then expands on the matters that the regulations may cover, but that first subsection is the key. Only matters arising from, or related to, a Community obligation or an arrangement with a territory with a view to ensuring the effective taxation of savings income in the UK and in that territory are relevant. 
 Amendment No. 200 would require that arrangements could be made with a territory other than a member state only after consultation and agreement. The amendment is rather curious, and insufficiently precise, as it does not make it clear with whom consultation should occur or whose agreement is necessary. It would be difficult to conclude an arrangement with a territory without consulting it or securing its agreement. 
 I should also like to make it clear to the Committee that a territory other than a member state may be prescribed as part of the scheme only if there is an arrangement with the territory that includes in its scope specific arrangements for the exchange of information to ensure the effective taxation of savings. That means negotiations and signing either a double taxation agreement or a tax information exchange agreement that includes within it relevant provisions relating explicitly to the effective taxation of savings. 
 Amendment No. 288 is intended to align the wording of the clause more closely with the directive. The amendment could prevent us from implementing the directive properly. As I have already said, 
 subsection (1) requires us to make regulations implementing, or dealing with, matters arising out of, or related to, a Community obligation or an arrangement with another territory. That means that the amendment is not needed. 
 Amendments Nos. 289 and 328 would repeat the limitation imposed by subsection (1) in subsections (9) and (10) of the clause. As I have already explained, subsection (1) of the clause is an overriding limitation on the whole clause, and it is not necessary to repeat it in other subsections. The clause allows us to implement the directive and any associated arrangements in full. That is what we will do. 
 The four amendments are unnecessary. The clause simply provides for implementing the directive and any associated arrangements with other countries. We will do that in a way that minimises administrative costs and compliance burdens, and we will consult fully on the new scheme. I hope that the hon. Gentleman will withdraw his amendments following my explanation. I confirm that we will publish a partial regulatory impact assessment when we start consultation. A full regulatory impact assessment will be published when regulations are laid.

Howard Flight: The Paymaster General has convinced me. I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Clause 196 ordered to stand part of the Bill. 
 Clause 197 ordered to stand part of the Bill.

Schedule 42 - Controlled foreign companies: exempt activities

Howard Flight: I beg to move amendment No. 318, in
schedule 42, page 431, line 36, leave out 'branch or agency' and insert 'permanent establishment'.

Nicholas Winterton: With this it will be convenient to discuss the following:
 Amendment No. 319, in 
schedule 42, page 432, line 16, leave out 'branch or agency' and insert 'permanent establishment'.
 Amendment No. 316, in 
schedule 42, page 432, line 44, leave out 'business' and insert 'trade'.
 Amendment No. 320, in 
schedule 42, page 432, line 45, leave out 'branch or agency' and insert 'permanent establishment'.
 Amendment No. 317, in 
schedule 42, page 432, line 46, leave out 'habitually' and insert 'ordinarily'.
 Amendment No. 321, in 
schedule 42, page 433, line 3, leave out 'branch or agency' and insert 'permanent establishment'.

Howard Flight: The Committee may be aware of the concerns expressed by the Institute of Chartered Accountants and other professional bodies about schedule 42. Clause 197 and schedule 42 extend the controlled foreign company provisions to payment protection companies. The effect of that is wide. Any UK-owned business carried on via a controlled foreign company that has a wide retail customer base with a large proportion of UK customers will be caught
 unless engaged in long-term or large-risk insurance. There are concerns about the complexity of the new provisions, which introduce a new test of persons who are ''habitually resident'' in the UK.
 Aside from the complexity, we have yet another example of provisions that could be contrary to EC law. In so far as, for example, the payment protection companies are Irish international financial service companies, or 12.5 per cent. companies, the provision appears to ignore the EC treaty and European Court of Justice case law by targeting the establishment of payment protection businesses in another, lower tax member state. In respect of companies located in Ireland, the problem is compounded by the removal of Ireland from the excluded countries regulation. We also question whether that step is legal under EC law. 
 Amendments Nos. 318, 319, 320 and 321 are intended to ensure that the correct term is used to take into account the repeal of the definition of ''branch or agency''. The provisions inserted into paragraphs 6 and 11 of schedule 25 of the Income and Corporation Taxes Act 1988 persist in the use of the term ''branch or agency'', rather than using the term ''permanent establishment''. Table (6) in schedule 43 repeals the definition of ''branch or agency''. Might it not be easier for the user of the legislation if the provisions were amended to reflect the correct terminology? 
 Amendments Nos. 316 and 317—these are all Law Society points, as Members will be aware—are intended to insert the readily understood term ''ordinarily'' resident. Proposed new paragraph 11(3), which will be inserted in schedule 25 of the 1988 Act, refers to carrying on a ''business''. That is a wider concept than used in existing legislation and should perhaps be amended to refer to carrying on a ''trade''. Proposed new paragraph 11(3)(c)(iii) uses the same term ''habitually resident'', which is not defined in the Bill or in the Income and Corporation Taxes Act 1988. Perhaps the provision should use the term ''ordinary resident'', which is known and more easily understood.

Dawn Primarolo: I shall ask my hon. Friends to oppose the amendments. The controlled foreign company legislation targets the avoidance of UK tax by companies that divert profits offshore. Schedule 42 withdraws exemption from the CFC rules in cases where a significant proportion of a company's income is derived from UK persons.
 Amendment No. 316 would restrict the application of schedule 42 in the context of the special rules for companies whose activities constitute banking and similar business. It would mean that in the case of such a company only income from a branch through which it carried on trade in the UK would be caught, but not income from a branch through which it carried on business in the UK. That is not acceptable. 
 Amendment No. 317 would replace the term ''habitually resident'' with ''ordinarily resident'' in that part of the schedule that is designed to identify UK profits that may no longer benefit from exemptions from the CFC rules. Far from 
 simplifying the rules, the change would introduce complexity and make them more difficult to operate. 
 Amendments Nos. 318 to 321 are unnecessary. Clause 197 brings schedule 42 into effect for accounting periods commencing on or after 27 November 2002. The changes to the CFC rules take effect ahead of the replacement of ''branch or agency'' with ''permanent establishment'' throughout the Taxes Act. That replacement is brought into effect by clause 152 only for accounting periods beginning on or after 1 January 2003. It will then apply to the CFC rules already in force and to the new rules introduced by schedule 42. Therefore, it is correct to use the term ''branch or agency'' in schedule 42, consistent with the legislation in force at the time from which it applies. 
 I reject the hon. Gentleman's suggestion that the clause is too wide. The rules are properly targeted against an identified loophole. In one of the CFC exemptions, companies that are no longer able to use the exemption will still be able, where appropriate, to claim one of the remaining five exemptions, including the motive test. 
 We do not envisage that the proposed changes will materially increase compliance burdens across the board. Most companies will be at one end or the other of the spectrum in dealing directly or indirectly with UK persons. 
 The UK CFC legislation has not been the subject of challenge under European Union law. The CFC rules contain significant elements that are not found in other countries' CFC rules, but the Government do not accept that the CFC legislation is no longer compatible. I commend the schedule to members of the Committee and ask them to reject the amendments.

Howard Flight: I do not know whether I am convinced but, in the interest of time, I beg to ask leave to withdraw the amendment.
 Amendment, by leave, withdrawn. 
 Schedule 42 agreed to. 
 Clauses 198 and 199 ordered to stand part of the Bill.

Clause 201 - Mandatory electronic payment by large employers

Question proposed, That the clause stand part of the Bill.

Howard Flight: We feel that it is wrong in principle to charge a penalty merely because a taxpayer did not pay electronically or in a manner specified by the Inland Revenue. The Government should encourage taxpayers to pay electronically but not coerce them, and the proposed penalty regulation is poorly drafted and, in any event, lacks proportionality. A fine of up to 10 per cent. of the tax payment is totally disproportionate.
 The clause appears to be aimed primarily at electronic payment of PAYE, but the penalty also applies to any tax administered by the Revenue, and we would welcome clarification on whether the Government intend to apply the provision to all 
 taxes, and if not, to which taxes. The substantive provisions are delegated to regulations that have not been published, and we repeat our strong belief that major provisions should be introduced by primary legislation. The clause should be withdrawn. If it is not, there should be a modest, fixed-rate penalty. The definition of a ''large employer'' should be amended so that it is consistent with the Companies Act 1989 definition. 
 Finally, as hon. Members will be aware, following last June's mandatory e-filing debate, various Members successfully appealed for a conscience provision for the Plymouth Brethren. The same issue now arises again in regard to clause 201. We hope that there will be a repeat acceptance of such a conscience provision for that religious group.

David Laws: We entirely share those views, so I shall not repeat them. On behalf of the Brethren, who are concerned about the issue, we are grateful to the Paymaster General for her sympathy, and we hope that she will continue to take such an attitude on the issue in future.

Dawn Primarolo: On a point of order, Sir Nicholas. I confirm what the hon. Gentlemen say about the Brethren. I do not want to be ruled out of order at the end of our proceedings before I have made the necessary and highly appropriate comments about our proceedings. I know that we are now very close to the end of the sitting. Would it be in order for me to make my comments now?

Nicholas Winterton: Yes, as long as they do not go beyond 6 o'clock.

Dawn Primarolo: I would thank all members of the Committee, especially the hon. Members for Arundel and South Downs, for Eddisbury, and for Hertford and Stortford (Mr. Prisk), and all their hon. Friends. I also thank the hon. Members for Yeovil and for Torridge and West Devon, and the Chief Secretary to the Treasury, who cannot be here, and the Economic Secretary. I thank the Whips—my hon. Friend the Member for Lincoln (Gillian Merron), the hon. Member for Spelthorne (Mr. Wilshire), and the now Under-Secretary of State for Trade and Industry, my hon. Friend the Member for Bradford, South—and all my other hon. Friends, who have been so wonderful in their support, as well as the Clerks, the Hansard Reporters, the police, and the Officers of the House.
 I particularly thank you, Sir Nicholas, and your co-Chairmen, Mr. McWilliam and Mr. Gale, for ensuring that we made such excellent progress. I thank everyone for what has been a wonderfully enjoyable experience, and I look forward to next year's Finance Bill.

Howard Flight: Further to that point of order, Sir Nicholas. I echo what the Paymaster General says, and I thank you for your amiable and efficient chairing. I hope that you will relay my thanks to Mr. McWilliam and Mr. Gale. I particularly thank the Clerks, Frank Cranmer and Miss Garratty. Poor Frank Cranmer has had an awful lot of work to do for the Opposition, and has been immensely helpful in getting our amendments right.
 I thank my colleagues, who are a splendid lot; I will not use up time naming their well-known constituencies. I thank and congratulate the Paymaster General and the Government team for its most professional presentation of the Bill. I thank the Hansard Reporters, the police, the ushers and the doorkeepers, and I cannot resist closing by saying that if only we could have had one more sitting, as we suggested, we would have finished the Bill.

David Laws: Further to that point of order, Sir Nicholas. May I add my thanks to those already expressed, and to you, Sir Nicholas, for the exemplary way in which you have chaired our proceedings. I thank the Clerks and officials, both those who supported the Bill and those who supported the Government. I thank the Minister, the Paymaster General and the Economic Secretary for the way that they responded to some of the issues brought up by Members on the Opposition Benches. I am particularly grateful for new clause 6, which will come forward later.
 I also congratulate Members on the Conservative Front Bench for the professional way in which they steered the Bill through. I do not know whether they will get their reward on Earth, but it will certainly be on record.

Adam Price: Further to that point of order, Sir Nicholas. I briefly echo all those thanks on behalf of Plaid Cymru. I am particularly grateful to the Government for accepting four of our amendments, which is a record for my party.

Nicholas Winterton: It has been a pleasure to chair the Standing Committee on the Finance Bill. I congratulate all Committee members on the constructive way in which they have dealt with a highly complicated and difficult Bill. I particularly congratulate the Front-Bench spokesmen on their commitment, knowledge, and dedication, and for the way in which they have ploughed through a very complicated Finance Bill. To each and all of them, on both sides of the Committee, I say well done. The Committee has been an example of Parliament working at its best.
 The Clerks, who have been super and have given me great assistance, have just said to me that it has been a pleasure to work with such a constructive and good-humoured Committee. That shows what the Committee has done in its sittings. I thank the Hansard Reporters, the police, and the staff of the House for making this an efficient and smooth-running Finance Bill. Finally, I thank my fellow Chairmen, John McWilliam and Roger Gale, for the assistance that they have given me. It has been a pleasure; I have enjoyed it. 
 It being Six o'clock, The Chairman proceeded, pursuant to Sessional Order D [28 June 2001] and the Order of the Committee [10 and 12 June 2003] to put forthwith the Question already proposed from the Chair. 
 Question put, That the clause stand part of the Bill.
The Committee divided: Ayes 13, Noes 7.

Question accordingly agreed to. 
 The Chairman then proceeded to put forthwith the Questions necessary to dispose of the business to be concluded at that time. 
 Question put, That clauses 202 to 213, schedule 43 and clause 214 stand part of the Bill:—
The Committee divided: Ayes 12, Noes 8.

Question accordingly agreed to. 
 Bill, as amended, to be reported. 
 Committee rose at five minutes past Six o'clock.